24th April 2017
If you have some spare cash and want a tax efficient investment the Enterprise Investment Scheme (EIS) may be the one for you. This is a government scheme that is designed to help small businesses, and start-ups in particular, attract much needed funding.
The scheme allows you as an investor to recover 30% of your investment in tax relief against your income tax for the year in which you make the investment (50% if the company qualifies as a small start-up). Investments into existing companies are capped at £1m and the small start-up relief is restricted to a maximum investment of £100,000. However, you are expected to leave your investment in the shares for at least 3 years or you will lose the income tax relief.
But the benefit doesn’t stop there. As long as you have met the rules for income tax relief there is no capital gains tax on selling the shares after the qualifying period. Plus, if you have made capital gains on selling other assets you can ‘roll over’ the taxable gain into the purchase of EIS shares. Whilst this does not eliminate the other gain altogether, it does mean that you can defer paying the tax on that gain until you have sold the EIS shares. The shares may also qualify for 100% relief from inheritance tax if you hold them for at least 2 years.
There are some restrictions on who can use the schemes, specifically anyone who is connected with the company as an existing shareholder or employee will not be eligible for the income tax relief and the exemption from capital gains. However, most can still benefit from the capital gains tax hold over relief.
Companies eligible for the scheme must be carrying on a trade, independent from other companies and not be quoted on a stock exchange. Certain trades, mostly related to land exploitation and financial activities, are excluded from the scheme. Although the scheme is targeted at ‘small companies’ the definition of small is surprisingly generous for existing companies. Your gross assets must be less than £15m and you must have fewer than 250 employees. A maximum of £5m can be raised in any 12 month period.
The limit for start-up companies is lower, with the cap on gross assets set at £200,000 and the employee limit fewer than 25. Any companies which have traded for 2 years or more will not qualify as a start-up. The maximum that can be raised by a start-up company is £150,000 in a 12 month period, but once they have reached that limit they can then raise additional capital under the main EIS scheme.
HMRC offer an advance approval service for companies interested in attracting EIS investments and the Wise & Co tax team have a lot of experience in assisting companies with applications to HMRC. Once you have your funding it must be used for the purposes of the trade within 2 years of issuing the shares. There are strict restrictions on how the money can be used.
We can of course guide you through the processes and help you to understand what is required from you to make the EIS scheme work for your business and your investors.