Enterprise Investment SchemeJacqueline McGregor
The Enterprise Investment Scheme (EIS) has been designed to increase investment in the early development of high potential growth businesses. Companies seeking EIS investment are typically more developed than those looking for funding using the Seed Enterprise Investment Scheme (SEIS) and the investment limits and tax reliefs available reflect this.
As with any investment, it is important that anyone participating in a share issue is aware of the risks involved. This is especially the case when looking at an EIS investment as there can be a significant risk to any capital invested. Investors should be very careful not to invest any money that they are unprepared to lose.
These investments are in small companies where the risk of the company failing can be high. The investments are also very illiquid and need to be held for at least three years before a share sale can be attempted. Many EIS opportunities include an exit strategy but of course, there are no guarantees.
EIS rules for investors
Income Tax Relief
Available to individuals who subscribe to a qualifying EIS share issue. Income Tax relief is allowed up to 30% of the cost of the EIS shares acquired. This amount can be set-off against that person’s Income Tax liability in the year in which the investment was made.
EIS relief is capped at £300,000, which means that the maximum investment that would qualify for Income Tax relief, is £1m in qualifying shares £2 million if at least £1 million of that is invested in knowledge-intensive companies. Since 6 April 2020, there are some additional reliefs for investing in EIS approved funds for knowledge-intensive companies.
Relief is conditional. To qualify, the following conditions must be met:
- The shares must be held for three years, from the date shares were acquired, or the date trade commenced if this was a later date.
- Individuals who are considered to be connected to the company cannot claim Income Tax Relief.
- If the EIS relief exceeds a person’s liability for a tax year, the relief is restricted to the amount that would reduce liability to nil.
There is a ‘carry back’ facility that allows all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.
Capital Gains Tax
- There is a Capital Gains Tax (CGT) exemption on qualifying gains earned on shares held for a minimum of three years.
- EIS investments also qualify for 100% CGT deferral relief if you use your qualifying gain from the sale of any asset to make any amount of investment in a company that qualifies for EIS.
- Should the investment be unsuccessful, tax relief can generally be claimed for any losses made on the shares bought. It is possible to set-off the amount of the loss against income rather than other capital gains – the set-off is reduced by any Income Tax relief already given.
Inheritance Tax relief
- Most EIS investments attract 100% Inheritance Tax relief after two years.
For its investors to be able to claim and keep the tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.
EIS rules for business
The main qualifying criteria for EIS investee businesses are as follows:
- The maximum amount of funds that a company can raise through investments qualifying for the EIS is £5M in any 12 months with a maximum of £12m over the company’s lifetime. There are higher limits for ‘knowledge-intensive’ companies.
- There is a maximum limit on the number of employees that the investee company can have when shares are issued. The company must have less than 250 full-time employees or their part-time equivalents. For groups of companies, the limit applies across the group. There are higher limits for ‘knowledge-intensive’ companies.
- The company’s gross assets (or of the group assets where the company is a parent company) must not exceed £15 million before any shares are issued and not be more than £16 million immediately afterward.
- There are also time limits as to when investments can be raised by the company and how and when the money must be spent.
- The company is allowed to have previously used the SEIS to raise investment.
It is very important that businesses looking to raise finance using the EIS scheme ensure that they qualify. Otherwise, their investors will be unable to claim the promised tax reliefs. HMRC offer an ‘advance assurance’ service for both schemes that help ensure everything is in order before raising finance.
We can assist you with any queries relating to the EIS. Please do not hesitate to be in touch.