Last week, we offered a cursory overview of EIS and SEIS schemes. Today, we would like to give a little more information about EIS schemes in particular.
This scheme’s aim is to help smaller, higher-risk enterprises raise funding so that they can grow. This type of company often finds it hard to get the necessary investment, and EIS programmes make it more attractive for investors to support budding enterprises by offering generous tax concessions.
Let us assume that a company has been in business for less than seven years. It is growing, but it needs investments to develop and grow even further. The bank is not interested and investors are worried about the elevated risk that the business holds at this stage.
This is where EIS comes in. It offers investors a guarantee that if things go wrong, then they will get more than 30% of their money back in terms of income tax and capital gains tax relief. Should everything proceed as planned, they not only get 30% income tax relief on the amount invested in the first year of their venture, but also do not have to fork out a penny in capital gains tax, provided they sell after at least three years.
Which businesses qualify?
Before a company qualifies to take part in the EIS programme, it must meet the following requirements:
- It must be an unquoted UK business
- It must have been in business for less than seven years
- It should not be in any financial difficulty
- Before the share issue, its gross assets should not exceed £15m
In any particular year, a business can raise a maximum of £5m per company and £1m per individual investor.
The money raised in this way must be used to develop and grow the company and not for other purposes, such as daily working capital.
The business also must carry out one of a list of qualifying trades, with the aim to generate a profit. HMRC, of course, wants its share in taxes later.
Examples of trades that will disqualify a business from partaking in the programme are: nursing homes, property development, accounting services, legal services, financial services, farming and shipbuilding.
What makes you a qualifying investor?
As expected, the EIS programme comes with as many strings attached as other tax relief schemes.
Prospective investors must meet the following criteria:
- He or she must not in any way have a connection with the business in question
- He or she must not hold more than 30% of the company shares
- He or she must subscribe for fully paid-up shares, and they must pay for them in cash
What are the possible pitfalls of the EIS programme?
Anyone who wants to qualify for the tax-free capital gains must hold his or her shares for at least three years. Should an investor sell within a three-year period, he or she will have to pay capital gains tax (CGT) when the shares are eventually sold and they will also have to repay the 30% tax relief they received during year one.
Should an investor not meet both conditions mentioned above, he or she will have to pay tax upon eventually selling the shares.
The income tax relief is subject to withdrawal if the company and/or the investor does not meet certain criteria.
Would you like to know more?
Whether you are a first time or frequent investor, we are happy to help. Download our Tax Efficient Guide or alternatively if you wish to learn more about our investment opportunities or anything else, please contact Martin Sherwood on 020 7843 0472 or email@example.com