What is an Enterprise Investment Scheme?
Enterprise Investment Schemes were launched in 1994 to replace Business Expansion Schemes. It is designed to encourage investment in small unquoted companies carrying on a qualified trade in the UK. Over £15 billion has been invested in EIS qualifying companies to date
Investment in such companies carries a higher risk of loss of capital and poor market liquidity meaning that it may be difficult, costly or time consuming to realise an investment. The tax benefits offered under EIS are intended to offer investors some incentive to counterweigh the risk.
EIS offers several different kinds of tax relief, available both to direct investors and investors through a managed EIS fund or portfolio service. They are conditional upon the company receiving investment being a qualifying company under the scheme. A brief summary of the tax benefits is as follows:
- 30% upfront income tax relief, which can be carried back to the previous tax year. The maximum subscription is currently £1,000,000 per investor per year, yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability)
- Capital Gains Tax(CGT) deferral – an investor can defer capital gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. This relief is limited to the amount being invested into the EIS and can be claimed by investors whose interest in the company does not exceed 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available.
- No CGT to pay on any gains made when the investment is realised after three years (five years for investments made before 6 April 2000), provided the EIS initial income tax relief was given and not withdrawn on those shares.
- Tax relief from investment losses – if EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or income in the year of disposal, potentially limiting a total loss to 38.5% of an investor’s capital.
- Shares do not form part of the estate for Inheritance Tax purposes, provided the investments have been held for at least 2 years at time of death and the company qualifies for Business Property Relief (“BPR”).
Qualifying companies and individuals
The rules for qualifying are complicated; for example, the following are some of the qualifications that must be met:
- The company must not have assets greater than £15 million.
- The company may have no more than 250 full-time equivalent employees.
- All capital employed must be actively engaged in the company within 24 months.
- The company must not be in specific industries such as coal and steel production, farming, leasing, financial services and property development.
- Entry into the scheme is subject to a decision and audit made by an appointed tax officer.
- The company must not be listed or have any intention of becoming listed at the time of the investment.
- The investor may not have more than a 30% interest in the company.
- No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company.
- The investor must not have any form of preferential shares.
- The investor must not have any other form of controlling interest in the company.
- The scheme must not be used for the purposes of avoiding tax.