The Enterprise Investment Scheme (EIS) is designed to help certain types of trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
This short guide summarises the various tax reliefs that are available through EIS together with the criteria that must be satisfied by the investor and the company recovering the investment in order to ensure that the investment will qualify for the various tax reliefs.
There are four possible tax benefits available through EIS:
- Income tax relief - 30 per cent of the cost of the investment (which must be the acquisition of Shares defined below) may be offset against a qualifying investor’s income tax liability in the tax year in which the Shares are acquired. There is also a carry back facility that allows the Shares to be set off against income tax liability in the preceding year, subject to the £300,000 maximum level of income tax relief per tax year.1
- Capital Gains Tax (CGT) relief - No CGT is payable by an investor on the first disposal of the Shares.
- Loss relief - If an investor incurs a loss on the first disposal of the Shares, this capital loss (after deduction of income tax relief) may be set off against income in the tax year of disposal or the previous tax year, rather than against capital gains.
- Deferral relief - CGT arising from the disposal of any asset can be deferred by investing that capital gain in EIS Shares, for a period commencing one year before and ending three years after the disposal. The original CGT that is deferred will be payable on the disposal of the EIS Shares.
Deferral relief is not subject to the annual investment limit and the connected person test, outlined below, and the investor does not have to hold the Shares for a period of three years following subscription in order to obtain this relief.
In order to take advantage of the benefits of the EIS scheme both a qualifying company and a qualifying investor must meet the following conditions.
In order to qualify, the Company:
- must issue full-risk ordinary shares carrying no preferential rights2 to dividends or assets on winding up and which are fully paid up in cash (the “Shares“);
- must be unquoted when the Shares are issued;
- must be a ‘small’ company which means that it does not have assets exceeding £15m preceding and £16m following the issue of the Shares3 and that it has less than 250 full-time employees;4
- must not have raised more than £5m in the year preceding the investment through either EIS or Venture Capital Trust (VCT) schemes;5
- must not be the subsidiary of or controlled by another company and if the company receiving investment has any subsidiaries, these must be at least 50 per cent owned by and under the control of that company;
- must carry on a qualifying trade. A ‘qualifying trade’ means most trades that are conducted on a commercial basis with a view to making profits, provided it is not an excluded activity (unless that excluded activity does not amount to a substantial part of the company’s trade). A ‘substantial part’ of the company’s trade is deemed to mean more than 20 per cent of the company’s trade;
Examples of an ‘excluded activity’ include dealing in land or shares; property development; money-lending, insurance and other financial activities; dealing in goods, other than ordinary wholesale and retail trades; leasing or letting assets on hire; receiving royalties or licence fees, other than those attributable to intangible assets created by the company; farming and market gardening; forestry; and operating or managing hotels, guesthouses, nursing or residential care homes. The Finance Act 2012 specifically excludes the acquisition of existing shares in another company from being a qualifying business activity;
- must have a permanent address in the UK throughout the period starting with the issue of the shares (on or after 6 April 2011) and ending three years later. Provided the issuing company has such a permanent establishment, the money raised under the EIS subscription can be used for the purpose of its qualifying trade (even if not carried on in the UK); and
- must apply the money raised from the issue of Shares towards a qualifying trade within 2 years of the issue, or 2 years after commencement of trading, whichever is the later.
Under the Finance Act 2012, the shares must not be issued in connection with, or as a consequence of, particular “disqualifying arrangements” which generate access to the reliefs where the benefit of the investment is passed onto another party or where the business activity would otherwise be carried on by another party. This is a new test that applies to shares issued on or after 6 April 2012 (even if the disqualifying arrangement occurred before that date).
- must not be ‘connected’ to the Company for a period of 2 years before and 3 years after purchasing the Shares. This means that he/his associates must not:
- be an employee, partner or paid director of the Company;
- or control or own more than 30 per cent of the Company6.
‘Associates’ are defined as business partners, trustees of a settlement where the investor is settlor or beneficiary and the Investor’s lineal family (which does not include brothers and sisters);
- must not dispose of any of his Shares in the company (unless this is to his spouse);
- must not receive any value from the company; and
- may invest a maximum of £1,000,000 in multiple qualifying companies in any tax year7.
EIS relief is provisional and may be withdrawn if during the period of three years from the issue of the Shares an event takes place which contravenes any of the above conditions governing relief.
For further information, please view our ebulletins on EIS and EIS fundraising.
The Finance Act 2012 will also introduce a new Seed Enterprise Investment Scheme.
The content of this note does not constitute legal advice and should be treated as general guidance only. If you require any further information in relation to any of the issues dealt with in this note, please contact David Scott or Charles Leveque.
20 July 2012
This was increased from £150,000 for investments on or after 6 April 2012.
The Finance Act 2012 allows the shares to carry a preferential right to dividends, providing the dividend amount and the date dividends are payable is not dependent on a decision of the company, the shareholder or anyone else and providing the dividends are not cumulative.
This applies to shares issued on or after 6 April 2012.
These figures apply to shares issued on or after 6 April 2012. Previously, the limit was 50 employees.
This applies from 6 April 2012. The limit was £2m for shares issued between 19 July 2007 and 6 April 2012.
This 30% requirement currently includes loan capital. The loan capital element of the capital connection test has been removed for shares issued on or after 6 April 2012.
The minimum investment requirement of £500 has been removed. The maximum investment has been increased from £500,000.