Enterprise Investment Schemes - Individual Considerations

The Enterprise Investment Scheme (EIS) was introduced in 1994 to encourage investment in entrepreneurial business ventures. The aim was to foster economic growth and innovation by supporting new businesses using tax reliefs to attract investment. On 6 April 2012 a number of changes to EIS were introduced by the Finance Act 2012 in respect of the both the incentives and the qualifying criteria. 

EIS Investor Incentives

The provisions of the EIS that encourage investment relate to tax incentives which apply to investors. They may be summarised as follows:

1. Income Tax Relief

• Individuals may invest up to £1,000,000 if it creates an interest of less than 30 per cent in a company
• Income tax liability for the year of the investment can be reduced by 30 per cent of the value of their investment, i.e. a maximum of £300,000 in any year
• Relief cannot be offset against dividend income
• All or some of the cost of the shares may be carried back to the previous year to be offset against tax liability in that year
• The shares must be held for a qualifying period of time which is 3 years from the date the shares were issued or the company started trading, whichever is the later
• Income tax relief can only be claimed by individuals not connected with the company

 

2.   Capital Gains Tax Relief

• If an individual received Income Tax relief then they will qualify for Capital Gains Tax relief if the shares are held for the three year period
• If Income Tax relief was not received then the Capital Gains Tax exemption will not apply

 

3.   Loss Relief

• If the shares are sold at a loss then the loss can be offset against any Income Tax liability for the year in which they were sold or income for the previous year, less any Income Tax relief received, instead of against Capital Gains Tax

 

4.   Capital Gains Tax Deferral Relief

• This is available to individuals and trustees of certain trusts

 

Qualifying Criteria

Individuals will not qualify for an EIS investment if:

• They are connected to the company by a financial interest of their own or of their partner, spouse or associate. This includes an interest of more than 30 per cent of the company or employment in the company
• They have not paid for their shares when they were issued
• They own a controlling stake in the company
• They own preferential shares
• They have arrangements to protect themselves from the normal risks of investing in shares
• The arrangement has no other commercial purpose than to generate tax relief

If you have any questions about the Enterprise Investment Scheme as an investor or a business Rollingsons has experienced lawyers who can assist you. For more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by telephone on 0207 611 4848.