The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
What you need to know about how this scheme works:
- All shares must be paid up in full, in cash, when they are issued.
- Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up.
- Relief can be claimed up to a maximum of £1,000,000 invested in such shares, giving a maximum tax reduction in any one year of £300,000 providing you have sufficient Income Tax liability to cover it.
- The shares must be held for three years from the date the shares were issued or after trade actually started.
- If you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the period above, any gain is free from Capital Gains Tax.
- Loss relief and carry back relief are also available.
- You do not have a ‘substantial interest’ in the company, at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares. ‘Substantial interest’ is defined as owning more than 30 per cent of the company’s issued share capital, or of its voting rights, or of the rights to its assets in a winding up. Shareholdings of associates are taken into account in arriving at the 30 per cent figure. ‘Associates’ include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren.
- Brothers and sisters are not counted as associates for EIS purposes.
- It does not permit employees of the company to claim EIS relief, but there is a specific exception for directors who are not considered employees and do not receive renumeration.
- The Gross Assets of the company cannot exceed £15 million and must have fewer than 250 full-time employees
- A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit.
- Most trades qualify, but some do not. A trade does not qualify if it consists wholly, or substantially, of ‘excluded activities’. A separate list of ‘excluded activities’ are available.
- Companies are not allowed to raise more than £5 million in total in any 12 month period from the venture capital schemes.
- The money raised by the share issue must also be employed for the purposes of the trade or research and development within two years of the shares being issued.