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 The Enterprise Investment Scheme provides for some significant income tax and capital gains tax reliefs for certain investors. It is a very complex relief and this helpsheet is designed simply to provide an overview of the relief.
The reliefs can be claimed by
- 'qualifying individuals' who subscribe for 'eligible shares' in 'qualifying companies' undertaking 'a qualifying business activity'
Claims for the relief cannot be made until a certificate has been received from the company issued on the authority of HMRC.
The Investment
The amount that can invested into EIS shares is unlimited. However only £400,000 (was previously £200,000 for 2005/06) invested in any one tax year will attract income tax relief and capital gains tax exemption. There is a minimum subscription of £500.
For the purposes of investment a husband and wife or civil partners are treated separately.
The subscription must be wholly in cash and the shares must be issued to raise money for a qualifying business activity with at least 80% of the money raised used for such an activity within 12 months of the shares being issued or if later within 12 months of commencing trade and the remainder used within a further 12 months.
Qualifying Individuals
A qualifying individual is one who is not connected with the company. This mainly excludes someone who is or has been an employee or director or who controls more than 30% of its capital. Associated persons such as spouse and children but not a brother or sister will also be taken into account. However, a subscriber can become a paid director after the shares are issued.
These connection conditions only apply for income tax relief and not the capital gains tax deferral.
Eligible Shares
Eligible shares are any new ordinary shares that are not redeemable for at least three years. They must be fully paid up at the time of issue and carry no preferential rights to dividends or assets on liquidation of the company.
Qualifying Company
A qualifying company is an unquoted trading company which includes those listed on AIM that is carrying on business wholly or mainly in the UK and whose trading activities are not specifically excluded.
The total gross assets of the company must not exceed £7 million before the issue of shares, nor £8 million afterwards.
From 2007/08, the company must also have fewer than 50 full time employees at the time the shares are issued.
For an investment to qualify for relief, the company must have not raised more than £2million under EIS, Venture Capital Trust or Corporate Venturing Schemes in the previous 12 months.
Qualifying Business Activity
Apart from conducting a trade wholly or mainly in the UK, the trade must not be an excluded trade which are principally finance, legal and accountancy services, leasing, property development, farming, forestry and timber, hotels, nursing or residential care homes.
The Tax Reliefs
These can be summarised as follows...
- 20% income tax relief against the individual's personal tax liability up to a maximum of enough tax liability to cover this. Relief is given in the tax year when the shares are purchased but one half of the amount purchased before 6th October in a tax year can be carried back to the previous tax year up to a maximum of £50,000.
- Deferred tax on other capital gains. A claim can be made for any part of a chargeable gain on the disposal of any asset to be deferred to the extent that it is matched by a subscription for EIS shares within one year before and three years after the disposal. The tax on the gain rolled will become due on the disposal of the EIS shares or if the individual ceases to be UK resident within 3 years of issue of the shares. The individual must be resident and ordinarily resident in the UK but there is no need to also qualify for income tax relief.
- No CGT on the disposal of EIS shares. There is no CGT if shares for which EIS income tax relief was granted are disposed of at a profit after a three year retention period from the date of issue, although the deferred gains may now become chargeable.
Where an investor defers a gain from one EIS investment to another taper relief is available from the earliest subscription of EIS shares.
Withdrawal of Reliefs
Reliefs can be taken away if the EIS share are disposed of within three years of issue, the company ceases to be a qualifying company during the three year period, the individual becomes connected with the company during the three year period or if the investor receives value from the company two years before or three years after the issue of shares.
How We Can Help You
We can advise you on all aspects of qualification for both income tax and capital gains tax reliefs for EIS investments.
Got a Question?
If you have any queries on any of the above, please ask a question
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