Enterprise Investment Schemes
The UK Government is actively looking for ways to help and promote growth in small and growing businesses. One of the methods it has is the use of Enterprise Investment Schemes.
These schemes provide generous Income Tax and Capital Gains Tax incentives to investors, subject to certain limits and conditions being met. RMT has the experience and knowledge to help you set up and maintain these schemes year on year.
Enterprise Investment Scheme (EIS)
Introduced in 1994, EIS provides Income Tax and Capital Gains Tax incentives to investors with the aim of helping smaller, higher-risk trading companies to raise finance. Investors can subscribe for shares in the company which in turn provides the company with a cash injection to help them grow.
Where the qualifying criteria is met (both from the company and the investor), the investor is able to claim income tax relief at 30% of the cost of the shares they subscribe for. This relief is set against the investor’s Income Tax liability for the year in which the investment is made or the prior year under certain circumstances.
As with many tax reliefs, there are some key conditions that need to be met to claim (and maintain) the income tax relief:
- Relief can only be claimed up to a maximum of £1.0 million invested in shares, giving a maximum tax reduction of £300,000.
- The shares must be held by the investor for at least 3 years from the date the shares are issued (or 3 years from date the trade starts if the investment occurs prior to trading).
- The investor must not be connected with the company.
In addition to the Income Tax relief available, the investor can also benefit from a Capital Gains Tax exemption. Where the investor has received Income Tax Relief (and this has not been withdrawn at a later date), and the shares are disposed of after the qualifying period, any gain arising on those shares is free from Capital Gains Tax.
If the shares are sold at a loss, this loss (less the Income Tax relief given) can be set off against income in the year in which the shares are sold or in the preceding year rather than being offset against other capital gains arising elsewhere.
Where an individual has a Capital Gains Tax liability and they invest in an EIS qualifying company within a set time period, they can elect to defer the Capital Gains Tax arising so that the gain only comes into charge when the EIS shares are subsequently sold.
Seed Enterprise Investment Scheme (SEIS)
Similar to EIS, SEIS was introduced in 2012 to specifically help early-stage companies raise equity finance. It is similar to EIS but is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering Income Tax relief at a higher rate.
Whereas EIS Income Tax Relief is at 30%, SEIS Income Tax Relief is set at 50% of the cost of the shares subscribed for although there is a maximum annual investment of £100,000.
In both cases, the regulations regarding the qualifying criteria are complex and specialist advice is required to ensure you don’t fall foul of these rules.