Enterprise Investment Scheme (EIS) Overview
HMRC new guidance on SEIS and EIS
EIS advance assurance process was tightened in 2019 and it is now a requirement to provide the name and addresses of the investors and so requesting approval ahead of any new campaign is no longer possible. This basically mean’s that once a fundraising round is closed, Arbroath will apply for tax relief along with the names and address of new shareholders so they HMRC can issue the relevant tax relief. Due to this new ruling Arbroath are no longer able to apply for SEIS tax relief due to our company now being more than 2 years old however EIS tax relief will be applied for at the end of the round.
The Enterprise Investment Scheme is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify. For the investor, it’s a tax efficient way to invest in small companies – up to £1,000,000 per person per year in qualifying companies.
What makes it even more attactive is the ‘carry back’ facility where investments can be applied to the preceding tax year.
Michael Portillo, Chief Secretary to the Treasury when the scheme was launched in 1993, said: “The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.” More than 20 years later, those “considerable difficulties” in raising small amounts of capital are still a pertinent feature of the business landscape.
On this page you can find out about:
What Tax Reliefs Are Available?
Carry back your Tax Relief • Restrictions
What tax reliefs available
1. Income Tax Relief
There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.
EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.
People connected with the company are not eligible for Income Tax Relief on their shares.
2. Capital Gains Tax exemption (CGT)
Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to be accrue their CGT exemption over a long period of time which can be a great attraction.
3. Loss relief
If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.
4. Capital Gains Tax deferral relief
Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from
the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose – connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.
There is a ‘carry back’ facility which allows the 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.
For more information, please see the HMRC website.
Connection to the Company
Should the investor be connected to the company, they are not eligible for Income Tax Relief. Connections are defined through financial interest or employment.
Connection by financial interest
An individual is connected with the company if they control the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the share issue. If during this time, the individual becomes connected, then the relief will be withdrawn. All relatives except brothers and sisters are included within these restrictions.
Connection by employment
Partners, directors and employees of the company are all connected with it and therefore not eligible, as are associates. Associates are business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue.
The only exceptions are Business Angels – where the connection is as a director who receives no remuneration from the company.
Claiming your tax relief
The investor can only claim relief once the company sends through an EIS3 form. Claims are made through the Self-Assessment tax return for the tax year in which the shares were issued.
Claims can be made up to five years after the investment after the first 31 January following tax year in which investment was made.
Tax relief that is reduced or withdrawn
Tax relief will be withdrawn if you become connected to the company or if the company loses its qualifying status.
The relief will be either reduced or withdrawn if the Shares are disposed of or if the investor receives “value” from the company such as a loan or an asset below market value.
Here’s a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in each case and you’re in the 45% tax bracket.
Case 1: The company does well and doubles its value and you hold the shares for three years
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill) Capital Gains Tax = £Zero
Your gain = £13,000 (£10,000 profit from the sale plus £3,000 income tax relief)
Case 2: The company value stays the same
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill) Share sales = £10,000
Your gain = £3,000 (from the income tax relief)
Case 3: The company closes and your shares are worth nothing
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
At risk capital = £7,000
Loss relief on at risk capital @ 45% = £3,150
Your actual loss = £3,850 (£10,000 – [£3,000 + £3,150])
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.
Please visit the HMRC website for further information on EIS tax relief.