EIS and SEIS tax breaks – how do they work?
The Enterprise Investment Scheme (EIS) is a government scheme that allows certain tax reliefs for investors who subscribe for qualifying shares in qualifying industries. It is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Below, we outline the benefits the Enterprise Investment Scheme provide the investor as well as a brief overview of the scheme rules.
The investor can expect:
- Income tax relief at the 30% rate of tax on the amount invested in qualifying investments of up to £1 million per annum. The amount subscribed can be carried back to the previous tax year for relief purposes, subject to the overriding investment limit for that year. The EIS relief may be withdrawn if certain events occur within three years, e.g. shares sold.
- Any gain arising on a disposal of the shares after three years to be free from capital gains tax.
- Deferral of capital gains (no limit) on any other assets, by reinvesting all or part of the gain into an EIS company within one year before, or three years after, the gain accrued. The deferred gain becomes chargeable to capital gains tax if certain events occur later.
- Relief for any losses made on the disposal of EIS shares against capital gains tax or, in some circumstances, income tax.
- The opportunity to participate in the running of the business and to receive reasonable remuneration for doing so.
Outline of the scheme rules
The main condition is that the scheme is limited to companies with gross assets of no more than £15 million before the investment. If so, the company can enjoy the opportunity to raise finance, either for initial start-up or for expansion. Throughout its relevant three-year qualifying period, the company must:
- Be an unquoted company.
- Have only fully-paid issued shares.
- Be a trading company, carrying on a qualifying trade, wholly or mainly in the UK.
- Exist for genuine commercial purposes, and not be part of a scheme for the avoidance of tax.
- Not be a 51% subsidiary of another company, or otherwise be under the control of another company.
- An investor cannot be ‘connected’ with the EIS company, i.e. he or she cannot own more than 30% of the shares, directly or indirectly.
- Individuals who are paid directors or employees of the EIS company at the time of the issue of shares are normally disqualified from claiming EIS relief. Otherwise, qualifying investors can in certain circumstances be paid for their work, provided the total remuneration package is ‘normal and reasonable’.
- The money raised by the EIS share issue must be wholly used for the qualifying business activity.
- Schemes that involve guarantees or exit arrangements will not attract tax relief.
The Seed Enterprise Investment Scheme (SEIS) was introduced from 1 April 2012 and is the sister scheme to the Enterprise Investment Scheme (EIS). It is designed for investing in even smaller companies and providing even more generous tax breaks and focuses on smaller, early-stage companies preparing or carrying on a new trade.
As an investor you can expect:
- Income tax relief – relief at 50% of the amount invested is available and can be carried back to the previous tax year.
- Final sale exemption – any gain arising on a disposal of the shares after three years are free from capital gains tax.
- Investment exemption – a 50% exemption from CGT on gains (100% exemption on gains accruing in 2012-13) reinvested into an SEIS company.
- Loss relief – relief for any losses made on the disposal of EIS shares against capital gains tax or, in some circumstances, income tax.
- Participation opportunity – the opportunity to participate in the running of the business and to receive reasonable remuneration for doing so.
As may be expected, the tax breaks have been introduced by the Government to encourage would-be investors in what, given the nature of the investment companies concerned, must be inherently risky ventures. However, readers with an entrepreneurial spirit, surplus cash, and the appetite for a handsome payback at shorter odds than winning the national lottery jackpot, may be interested to learn more.
If you would like further information on these schemes, please get in touch with our tax team on 01903 234094.