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Enterprise Investment Scheme Guide for investors

26 September 2018

The Enterprise Investment Scheme (EIS) is designed to encourage individuals to make equity investments in higher risk small to medium sized unquoted companies, by offering a raft of tax reliefs.

Outline of tax reliefs

In order to encourage investment in EIS companies, the government offers tax reliefs. These can give total tax reliefs of up to 98% of the sum invested:

EIS cash subscription

£100,000

Income Tax relief at 30%

(£30,000)

CGT Deferral relief at 28%

(£28,000)

Inheritance Tax relief at 40%

(£40,000)

Net cost of investment

 £2,000

Income tax relief

An investor who subscribes in cash for ordinary or non-cumulative fixed preference shares in an EIS qualifying company can obtain income tax relief of up to 30 per cent on investments of up to £1m each year.

After 6 April 2018, this can be increased to £2m per year if the excess over £1m is invested in ‘knowledge intensive companies’.

This relief can be claimed either in the tax year the investment is made, or in the previous year. However, EIS income tax relief is limited by the amount of tax paid by the investor – it can reduce the investor’s tax liability to nil, but no more.

Inheritance tax exemption

Provided a shareholder has owned shares in a qualifying unquoted trading company for at least two years and certain conditions are met at the time of transfer, inheritance tax business property relief of 100 % is available, which reduces the inheritance tax liability on the transfer to nil.

There is no limit on the amount a shareholder can invest in EIS companies for inheritance tax relief purposes.

CGT deferral relief

Investors with capital gains made up to three years before or one year after an EIS investment is made can claim ‘deferral relief’ against those gains at up to 28%, for gains on residential property or carried interest, and up to 20% on other gains.

Deferred gains do become taxable again on certain events, such as a sale of the EIS shares.

The £1m annual limit does not apply for CGT deferral relief purposes – any amount can be deferred, although EIS income tax relief will be restricted.

Exemption from CGT

If an investor holds EIS shares for at least three years, any capital gain realised on the disposal of the shares will be capital gains tax free, provided income tax relief has been given and has not been withdrawn.

Loss relief

If a loss is made on the disposal of EIS shares at any time, the loss, net of income tax relief, may be claimed against either current year or future capital gains, or, by election, against income of the current or previous tax year. For a 45% taxpayer, this reduces the loss as follows:

 

EIS cash subscription

£100,000

Income Tax relief at 30%

(£30,000)

Loss relief

 (£31,500)

Net loss

£38,500

 

Qualifying unquoted trading company

There are a number of conditions that a company must fulfil in order to qualify under the EIS. In brief, the main conditions are as follows.

Legislation, which took effect from November 2015, places restrictions on companies that have been trading for more than seven years, and limits the total amount a company can raise from venture capital schemes and other State Aid to £12m.

The company or its subsidiary must carry on a qualifying trade which excludes certain financial and so-called ‘passive’ activities such as hiring plant, letting property and receiving royalties.

Additionally, certain land-backed trades such as operating hotels, nursing homes, farming, forestry and property development do not quality, nor do shipbuilding, coal mining, steel production, legal and accounting services or the generation of electricity, power, fuel or gas.

A company does not qualify if its gross assets immediately before the EIS share issue exceed £15m or immediately afterwards exceed £16m. The company must have fewer than 250 employees when the shares are issued, and the maximum amount that can be raised from Venture Capital Schemes and other State Aid is £5m in a twelve month period.

Higher limits apply to certain ‘knowledge intensive companies’, and there are restrictions on how a company spends the money raised, but, broadly, provided the money is spent to grow and develop the business, and not to make an acquisition, this shouldn’t be a problem for investors.

If a company fails to meet the conditions in the three years following the investment, or an investor sells or otherwise disposes of the shares, the tax reliefs will be lost.

Qualifying investors

In order to claim EIS relief an investor must:

  • Not already hold shares which are not SEIS or EIS shares, except for subscriber shares
  • Not be an employee, or a Director, unless complex Business Angel rules apply
  • Not, together with his ‘associates’, hold more than 30% of the company (associates are business partners, spouses, lineal relatives, but not siblings).

The investment process

Before investing in a company offering EIS reliefs, investors should consult their tax and financial advisers.

Additionally, investors should ask to see the Company’s ‘advance assurance’ letter from HMRC. Advance Assurance does not guarantee that EIS tax reliefs will be available, but it does give a degree of comfort.

Once the shares have been issued and the company has traded for at least four months, they will apply to HMRC for the EIS certification and investors should receive an ‘EIS3 Certificate’ within a couple of months.

The EIS 3 Certificate is needed before a claim for any of the EIS tax reliefs can be made. Investors’ tax or financial advisers will be able to assist with the claim if necessary.

How can we help?

If you would like more information about the EIS or other issues surrounding equity investment in your business, please contact your usual BDO contact or Sean Lavery, Maybeth Shaw or Paul McCourt.

See also:

Enterprise Investment Scheme Guide for companies

Knowledge intensive companies