The Enterprise Investment Scheme exists to help independent, UK, trading companies raise equity finance to fund growth and development. It is a vital source of funding for many companies – it has been around since 1984, and in that time has raised over £22bn for over 33,000 companies.
However, EIS is, broadly, aimed at early-stage companies, and most AIM listed companies won’t qualify, either because they are too old, too big, carry on an “excluded activity” or may have already raised the maximum available under EIS and the Venture Capital Trusts Scheme.
Of course, some AIM companies do qualify and, if they do, this offers substantial tax reliefs that should not be overlooked.
It is important to say straightaway that EIS tax reliefs will only be available if you subscribe for a new share issue – shares bought second hand on AIM will not qualify, as the EIS’s objective is help companies directly raise equity finance. EIS is most likely to be available on a Company’s Initial Public Offering (IPO) or a pre-IPO share issue.
Income tax relief
Income tax relief is available to investors at 30% (regardless of your marginal rate of tax) on the amount subscribed. This is limited only to the amount of your income tax liability – you cannot claim a tax repayment of more than you have paid in tax (which can catch out investors who are cash rich, income poor).
The maximum investment on which EIS relief can be claimed is £1m per year, and a further £1m can be invested in an approved ‘Knowledge intensive company’. Income tax relief can be claimed in the year the shares are issued or carried back to the prior tax year. There is a three-year qualifying period, and the tax relief will be clawed back if the shares are disposed of, or the company ceases to meet certain requirements within that period.
Capital gains tax exemption
Provided income tax relief has been given and not withdrawn, disposals of EIS qualifying shares are exempt from CGT after the end of the three-year qualifying period.
Investors can use an EIS share issue to defer a gain on any asset disposed of in the three years before or one year after the EIS share issue. It must be remembered, though, that deferred gains are just that – deferred. They will come back into charge when the EIS shares are disposed of, or if the company ceases to qualify within the three-year qualifying period. The deferred gain will also be taxed at the rates applicable at the time the gain recrystalises, so this could mean a higher tax liability.
If EIS qualifying shares are held at death, the deferred gain does not come back into charge.
If a loss is incurred on AIM shares, that loss can be claimed against other gains of the same tax year or carried forward. However, if the shares are EIS qualifying shares, the loss can be set against income of the same or prior tax year – given that income tax rates are typically higher that CGT rates, this is normally beneficial.
Inheritance Tax Business Relief
Many AIM-quoted companies qualify for Business Relief from Inheritance tax, subject to the usual inheritance tax two year holding period requirement. EIS qualifying shares will also qualify for this relief.
Accessing EIS investee companies on AIM
There are likely to be two routes for most investors – direct subscription for new shares in an AIM IPO share issue, or via an EIS AIM Fund Manager. A quick Google suggests that there aren’t many EIS Funds focussed on AIM companies, but they are out there. Funds offer a portfolio approach and are often the best option for EIS investors wanting to spread their risk.
AIM listed companies are often seen as attractive because they offer tax advantages, particularly the inheritance tax reliefs, whilst not suffering the perceived high risk and lack of liquidity posed by other unlisted companies. Some AIM investments will also qualify for EIS reliefs, and these substantially enhance the tax benefits available. Even so, shares that qualify for the EIS reliefs will still be higher risk than mainstream investments, so it is always sensible to get expert advice from a qualified Independent Financial Adviser on selecting your investments.
For advice or support on any EIS or IHT issues, please contact Fiona Hall.