There are three schemes by which the Government seeks to make investment in small/start up companies more attractive to investors by offering tax relief.
These are EIS, VCT and SEIS. SEIS has broadly the same rules as EIS, but is for smaller companies, has a smaller maximum investment limit, but a greater rate of tax relief to reflect the additional risk.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)offer significant advantages to individuals investing directly in small unquoted companies, provided both the investment and the company meet certain criteria.
For full EIS income tax relief, the shares in the EIS company must be ordinary shares that have been subscribed for by the individual, they must be held for at least three years, and the investor must not be connected with the company, which is defined as holding more than 30% of the share capital, or by being an employee/director, both of which also include associates’ interests.
The investment is often made directly into the company but it is possible to get relief for EIS funds. The company must be unquoted (to include AIM listed shares), invest the funds within certain time limits, and undertake a qualifying trading activity. There are also limits on the number of employees , net assets of the company and on the amount raised under EIS. The company must maintain its qualifying status for the minimum holding period.
Qualifying investments receive income tax relief at 30%, and it is necessary to have paid at least this amount of tax in the tax year of investment to qualify for income tax relief. It is possible to carry investment back as if it were treated as paid in the earlier year to obtain relief if preferred.
If shares qualify for income tax relief, they will also automatically qualify for CGT relief in that no CGTwill arise on any gain on the shares provided they are held for the minimum period. Tax losses are available if the shares value is reduced to nil, but this is reduced by any income tax relief obtained. In most circumstances an EIS loss may be utilised against income or gains.
Separately, it is possible to claim CGT deferral relief, whereby gains arising on the disposal of other assets may be deferred by the ‘reinvestment’ of the gain into EIS shares.
The gain will fall back into charge when the EIS shares are disposed of. Finally, after two years, as unquoted shares the investment would also qualify for 100% BPR from IHT, meaning there would be no charge on death or lifetime chargeable transfer.
The VCT scheme is similar, but involves investing in funds that spreads the risk. VCTs are companies that are normally listed on the stock exchange and are similar to investment trusts.
The limits for VCT investments are smaller, but all dividends and gains arising from the investment are exempt from tax. VCT investment does not permit CGT deferral relief of other gains. SEIS works in a similar way to EIS but is for much smaller companies, with much smaller limits.
Additionally it is possible to be a director of a SEIS company and still obtain relief. In addition, up to 50% of other gains can be relieved entirely (rather than deferred) to the extent of the SEIS investment.
Investors can only claim EIS relief once they receive an EIS 3 certificate from the company to show that the investment qualifies for relief. The company can obtain advance assurance from HMRC that it qualifies, thereby increasing its appeal to potential investors, and we have assisted a number of companies in obtaining EIS certification as part of their process of seeking investment and growth.
To download a copy of our EIS factsheet, please click here.
