Enterprise Investment Scheme
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The Enterprise Investment Scheme provides for some significant income tax and
capital gains tax reliefs for individual investors in unquoted trading
companies. There are some very very complex conditions which must met for the
tax reliefs to be given, so this helpsheet can only give a brief overview of how
the various tax reliefs work.
- Essentially the investors claim tax relief according to the amount they
invest in new shares issued by the company under the EIS scheme, known as EIS
Claims for the tax relief cannot be made until a certificate has been
received from the company issued on the authority of HMRC.
The Tax Reliefs
There are three separate EIS tax reliefs that can be summarised as follows...
- 20% income tax relief of the amount invested, which is set against
the individual's personal tax liability, subject to there being enough tax
liability to cover this. The relief is given in the tax year when the shares
are subscribed for but one half of the amount purchased before 6th October in
a tax year can be carried back to the previous tax year up to a maximum of
- Deferred tax on other capital gains. A claim can be made for any
part of a chargeable gain on the disposal of any asset to be deferred to the
extent that it is matched by a subscription for EIS shares within one year
before and three years after the disposal. The tax on the deferred gain is
rolled into the EIS shares and will become due on the disposal of those EIS
shares, or if the individual ceases to be UK resident within 3 years of issue
of the shares. The individual must be resident and ordinarily resident in the
UK but there is no need to also qualify for income tax relief on the EIS
- No CGT on the disposal of EIS shares. There is no CGT payable if
shares for which EIS income tax relief was granted are disposed of at a profit
after a three year retention period from the date of issue, although any
deferred gains rolled into those share may now become chargeable to CGT.
Where an investor defers a gain from one EIS investment to another, taper
relief is available from the earliest subscription of EIS shares.
The amount that can invested into EIS shares is unlimited. However only
£500,000 (2008/09) invested in any one tax year will attract income tax relief
and capital gains tax exemption. There is a minimum subscription of £500.
For the purposes of investment a husband and wife or civil partners are
The subscription must be wholly in cash (rather than loans) and the shares
must be issued to raise money for a qualifying business activity with at least
80% of the money raised used for such an activity within 12 months of the shares
being issued or if later within 12 months of commencing trade and the remainder
used within a further 12 months.
Individuals who qualify for tax relief
To qualify for the EIS income tax relief and CGT exemption the investor must
not be connected with the company during a period starting two years before the
issue of the EIS shares, and ending three years afterwards. This mainly excludes
someone who is an employee or paid director of the company during that period,
or who controls more than 30% of the company’s voting shares. The shareholdings
of associated persons such as spouse and children, but not a brother or sister,
will also be taken into account. A subscriber can receive reasonable
remuneration as a director of the company after the shares are issued.
Any investor can benefit from CGT deferral on investment in EIS shares,
whether connected to the company or not.
The EIS Shares
The EIS shares must be new ordinary shares that are not redeemable for at
least three years. They must be fully paid up at the time of issue and carry no
preferential rights to dividends or assets on liquidation of the company.
The EIS Company
To issue EIS shares the company must be an unquoted company, which includes
those listed on AIM, and there must be no arrangements for it to become quoted.
For at least the three years after issuing the EIS shares it must carry on a
trade or trades that do not include to a significant extent (taken to be 20% or
more) an activity that is specifically excluded by the legislation. Excluded
activities include leasing, banking, accountancy, dealing in land and land based
trades such as farming, property development or nursing homes.
The total gross assets of the company must not exceed £7 million before the
issue of shares, nor £8 million afterwards. For shares issued on or after 6
April 2007 the company must have fewer than 50 full time employees (or
equivalent part-timers) at the time the shares are issued.
For shares issued after the 2007 Finance Act is passed the company is limited
to raising no more than £2 million under the EIS, VCT or corporate venturing
schemes in a 12 month period.
Withdrawal of Reliefs
The tax reliefs can be taken away if the EIS shares are disposed of within
three years of issue, the company ceases to qualify as unquoted or trading, or
the individual becomes connected with the company during the same year period.
The tax relief may also be withdrawn if the investor receives value from the
company in the period beginning two years before the issue of the shares to
three years afterwards.
How We Can Help You.
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:firstname.lastname@example.org
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Article Published/Sorted/Amended on Scopulus 2008-04-10 10:13:39 in Tax Articles