The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors in qualifying shares in these companies.
There are really two separate schemes within EIS:
• a scheme giving income tax relief on the investment and a CGT exemption
on gains made when the shares are disposed of and/or
• a scheme aimed at providing a CGT deferral.
An individual can take advantage of either or both of these schemes.
The Reliefs Available
Income tax relief
• Investors may be given income tax relief at 20% on their investments
of up to £400,000 a year.
• The income tax relief is withdrawn if the shares are disposed of within
three years.
CGT exemption
• Gains on the disposal of EIS shares are exempt unless the income
tax relief is withdrawn.
• The CGT exemption may be restricted if an investor does not get full income
tax relief on the subscription for EIS shares.
• Losses on the disposal of EIS shares are allowable. The amount of the
capital loss is restricted by the amount of the EIS income tax relief still
attributable to the shares disposed of.
• A capital loss arising on the disposal of EIS shares can be set against income.
CGT deferral
• Gains arising on disposals of any assets can be deferred against
subscriptions for shares in any EIS company.
• Shares do not have to have income tax relief attributable to them in order
to qualify for deferral relief.
• The gain will become chargeable in the tax year when the subscription shares
are disposed of.
• There is no upper limit on the amount of deferral relief available to an
individual although there is a limit on investment in a single company or
group of companies.
Qualifying Companies
Companies must meet certain conditions for any of the reliefs to be available for the investor.
• The company must be unquoted when the shares are issued and
there must be no arrangement in existence at that time for it to
cease to be unquoted.
• All the shares comprised in the issue must be issued to raise money
for the purpose of a qualifying business activity.
• The money raised by the share issue must be wholly employed within
a specified period by the company.
For companies wishing to raise new funds under EIS the following additional conditions are imposed from 6 April 2007:
• the company or group must have fewer than 50 full time employees.
• the amount of capital raised in any 12 month period is limited to £2 million.
Qualifying business activities
A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:
• dealing in land, in commodities or futures or in shares, securities or
other financial instruments
• financial activities
• dealing in goods other than in an ordinary trade of retail or wholesale
distribution
• easing or letting assets on hire
• receiving royalties or licence fees, other than, in certain cases, such payments
arising from film production, or from research and development
• providing legal or accountancy services
• property development
• farming or market gardening
• holding, managing, or occupying woodlands
• operating or managing hotels, guest houses or hostels
• operating or managing nursing homes or residential care homes.
Time period in which the money is invested
In most cases at least 80% of the money must be used within 12 months after the date on which the shares were issued and the remaining balance within the following 12 month period. Where the qualifying business activity has not started:
• the company must begin to carry on the trade within two years after
the date of issue of the shares
• the above deadline is extended to 12 months and 24 months after the
date on which trading commences.
How to Qualify for Income Tax Relief
Eligibility for income tax relief is restricted to companies with which you are not 'connected' ...
