Enterprise Investment Scheme (EIS)

Summary

The EIS is a package of tax reliefs that was introduced to encourage equity investments in small unquoted companies carrying on a qualifying trade. Investing in small businesses often carries a high risk, and the tax reliefs on offer are intended to offer some compensation to the investors for that risk and make investing more attractive.

Tax Relief for Investors

There are five tax reliefs available to investors in companies qualifying under EIS, and the basic rules are as follows:

  1. Income Tax Relief

    • 30% of the amount invested can be offset against personal income tax liability
    • Shares must be held for at least 3 years
    • No minimum amount of investment
    • Maximum qualifying investments of £1m in any tax year – i.e. maximum tax relief £150,000
    • Shares must be fully paid for when issued and be full-risk Ordinary shares
  2. Capital Gains Tax Exemption

    • Any gains on the sale of the shares are exempt from CGT
    • Shares must be held for at least 3 years
    • Income Tax relief must have been claimed
  3. Capital Gains Tax Deferral

    • Gains that are subject to CGT can be deferred where some or all the gain is invested into an EIS qualifying company
    • The deferral period is for the duration that the EIS shares are held
    • The disposal of the asset that gave rise to the chargeable gain must have been within 36 months before or 12 months after the EIS investment
  4. Loss Relief

    • If EIS shares are disposed of at a loss, this loss can be offset against the investor’s income tax or capital tax liabilities in the year of disposal or previous year
    • The loss on which tax relief is given is net of any income tax relief obtained when the investment was made
  5. Inheritance Tax Relief

    • Shares in EIS qualifying companies will normally qualify for Business Property Relief for Inheritance Tax purposes.
    • Relief can be up to 100% so long as the shares are held for at least 2 years

A summary of income tax relief for a 40% taxpayer who makes a qualifying EIS investment of £50,000, and the company subsequently goes under resulting in a total loss for the investor is:

Income Tax relief (£50,000 x 30%) £15,000
Loss relief (£50,000 - £15,000) x 40% £14,000
Total Income Tax relief £29,000 (58% of investment)

Investor Restrictions

Investors who are connected to the company are not eligible for Income Tax relief on EIS investments. The connection can be defined in two ways:

  1. Connection by Financial Interest

    • An individual is connected to a company if they control or own more than 30% of the issued share capital or voting rights
    • These conditions apply to 2 years before and 3 years after the investment is made
    • All shares owned by business partners and direct relatives (excluding brothers and sisters) are included in these restrictions
  2. Connection by Employment

    • Partners, directors and employees of a company are connected to it and therefore ineligible
    • These conditions apply to 2 years before and 3 years after the investment is made
    • There is an exclusion for Business Angels who are investors and directors in a company but do not take a salary

Qualifying Companies

There are EIS qualifying conditions for companies to meet both in terms of their nature and size, and in respect of the trade that they undertake. Firstly, companies must tick all of these qualifying criteria:

  • Unquoted limited company (AIM listed companies are eligible)
  • Less than 250 full-time employees
  • Gross assets less than £15m
  • Must not be controlled by another company
  • Subsidiary companies must be qualifying companies
  • Carry on a qualifying trade
  • Be UK resident or have a permanent establishment in the UK

Excluded trades for the purposes of qualifying for EIS include:

  • Dealing in land, commodities and financial instruments
  • Financial activities such as banking, insurance and financing
  • Providing legal or accountancy services
  • Property development
  • Operating or managing hotels or nursing/care homes

A company can carry on some excluded activities, but these must not form more than 20% of the company’s activities.

Restrictions on Money Raised

A company is restricted in terms of the amount of money it can raise through EIS and must comply with the conditions regarding using the money raised through EIS:

  • Companies are not allowed to raise more than £5m in total during any 12 month period through EIS and the other government funded venture capital schemes (Venture Capital Trusts and Seed Enterprise Initiative Scheme)
  • The money raised must be used in a qualifying trade or preparing to carry out a qualifying trade, including research & development
  • The money raised must be spent on a qualifying trade within 2 years of receipt

Application Process

The EIS is administered by HMRC through the Small Company Enterprise Centre (SCEC). The SCEC makes the decision on whether a company qualifies under the scheme.

Companies can apply to the SCEC for advance approval of their proposed share issue. This is not compulsory but is recommended to give investors comfort that their investment is going to qualify for the various tax reliefs. Once the shares are issued, whether or not advance approval has been sought, the company completes a Form EIS1 and submits it to the SCEC. This form is available from the HMRC website: http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=xcne6YDvGD0&formid=6

If the SCEC approves a company’s application for EIS it will issue a form EIS2 and sufficient forms EIS3 to give to the investors to enable them to claim their tax relief.

The investors claim their tax relief through their annual self-assessment tax return once they have received the Form EIS3. Claims are normally made in the year of investment, but can be made up to 5 years later.

PLEASE NOTE: The availability of any tax relief, including EIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment. Please visit the HMRC website for further information on EIS tax relief: HMRC website EIS guidance - http://www.hmrc.gov.uk/eis/

Seed Enterprise Investment Scheme (SEIS)

Summary

The SEIS is a package of tax reliefs that was introduced in April 2012 as an extension of the EIS to encourage equity investments in small early-stage companies carrying on a qualifying trade. Investing in small businesses often carries a high risk, and the tax reliefs on offer are intended to offer some compensation to the investors for that risk and make investing more attractive. The SEIS scheme recognises the particular difficulties that early-stage companies face in attracting investment by offering tax relief at a higher rate than EIS – 50% instead of 30%.

Tax Relief for Investors

There are five tax reliefs available to investors in companies qualifying under SEIS, and the basic rules are as follows:

  1. Income Tax Relief

    • 50% of the amount invested can be offset against personal income tax liability
    • Shares must be held for at least 3 years
    • No minimum amount of investment
    • Maximum qualifying investments of £100,00 in any tax year – i.e. maximum tax relief £50,000
    • Shares must be fully paid for when issued and be full-risk Ordinary shares
  2. Capital Gains Tax Exemption

    • Any gains on the sale of the shares are exempt from CGT
    • Shares must be held for at least 3 years
    • Income Tax relief must have been claimed
  3. Capital Gains Tax Deferral – tax year 2012/13 only

    • Gains made in the tax year 2012/13 that are subject to CGT can be deferred where some or all the gain is invested into an SEIS qualifying company
    • The deferral period is for the duration that the SEIS shares are held
    • The disposal of the asset that gave rise to the chargeable gain must have been within 36 months before or 12 months after the SEIS investment
  4. Loss Relief

    • If SEIS shares are disposed of at a loss, this loss can be offset against the investor’s income tax or capital tax liabilities in the year of disposal or previous year
    • The loss on which tax relief is given is net of any income tax relief obtained when the investment was made
  5. Inheritance Tax Relief

    • Shares in SEIS qualifying companies will normally qualify for Business Property Relief for Inheritance Tax purposes.
    • Relief can be up to 100% so long as the shares are held for at least 2 years

A summary of income tax relief for a 40% taxpayer who makes a qualifying SEIS investment of £10,000, and the company subsequently goes under resulting in a total loss for the investor is:

Income Tax relief (£10,000 x 50%) £5,000
Loss relief (£10,000 - £5,000) x 40% £2,000
Total Income Tax relief £7,000 (70% of investment)

Investor Restrictions

Investors who are connected to the company are not eligible for Income Tax relief on SEIS investments. The connection can be defined in two ways:

  1. Connection by Financial Interest

    • An individual is connected to a company if they control or own more than 30% of the issued share capital or voting rights
    • These conditions apply to 2 years before and 3 years after the investment is made
    • All shares owned by business partners and direct relatives (excluding brothers and sisters) are included in these restrictions
  2. Connection by Employment

    1. Employees of a company are connected to it and therefore ineligible (note that Directors are not deemed to be employees for this purpose under SEIS rules)
    2. These conditions apply to 2 years before and 3 years after the investment is made

Qualifying Companies

There are SEIS qualifying conditions for companies to meet both in terms of their nature and size, and in respect of the trade that they undertake. Firstly, companies must tick all of these qualifying criteria:

  • Unquoted limited company (AIM listed companies are eligible)
  • Less than 25 full-time employees
  • Gross assets less than £200,000
  • Any trade carried on by the company must be less than two years old
  • Must not be controlled by another company
  • Subsidiary companies must be qualifying companies
  • Carry on a qualifying trade
  • Be UK resident or have a permanent establishment in the UK
  • Had no investment from a Venture Capital Trust (VCT) or benefited from the EIS scheme

Excluded trades for the purposes of qualifying for SEIS include:

  • Dealing in land, commodities and financial instruments
  • Financial activities such as banking, insurance and financing
  • Providing legal or accountancy services
  • Property development
  • Operating or managing hotels or nursing/care homes

A company can carry on some excluded activities, but these must not form more than 20% of the company’s activities.

Restrictions on Money Raised

A company is restricted in terms of the amount of money it can raise through SEIS and must comply with the conditions regarding using the money raised through SEIS:

  • Companies are not allowed to raise more than £150,000 in total through SEIS
  • The money raised must be used in a qualifying trade or preparing to carry out a qualifying trade, including research & development
  • The money raised must be spent on a qualifying trade within 3 years of receipt.

Application Process

The SEIS is administered by HMRC through the Small Company Enterprise Centre (SCEC). The SCEC makes the decision on whether a company qualifies under the scheme.

Companies can apply to the SCEC for advance approval of their proposed share issue. This is not compulsory but is recommended to give investors comfort that their investment is going to qualify for the various tax reliefs. Once the shares are issued, whether or not advance approval has been sought, the company completes a Form SEIS1 and submits it to the SCEC. This cannot be done until the company has been trading for four months or it has spent at least 70% of the money raised from the share issue. Form SEIS1 is available from the HMRC website: http://www.hmrc.gov.uk/forms/seis1.pdf

If the SCEC approves a company’s application for SEIS it will issue a form SEIS2 and sufficient forms SEIS3 to give to the investors to enable them to claim their tax relief.

The investors claim their tax relief through their annual self-assessment tax return once they have received the Form SEIS3. Claims are normally made in the year of investment, but can be made up to 5 years later.

PLEASE NOTE: The availability of any tax relief, including SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment. Please visit the HMRC website for further information on SEIS tax relief: Large Tab link to: HMRC website SEIS guidance - http://www.hmrc.gov.uk/seedeis/index.htm

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