Enterprise Investment Scheme - Adding value for investors

The Enterprise Investment Scheme (EIS) is designed to help smaller trading companies raise finance by offering various tax reliefs to investors who subscribe for ordinary shares in the company.

The four possible tax reliefs for investors are as follows:

1. Income Tax relief at 30% on investments of up to a maximum of £500,000 per annum (increasing to £1 million from 6 April 2012). Provided the investor has sufficient tax liability for the year to cover the relief available, part or all of the Income Tax relief may be carried back to the previous tax year. The shares need to be held for a period of three years, otherwise the relief is withdrawn.

2. Capital Gains Tax exemption on sale. Provided again that the shares have been held for at least three years prior to the disposal.

3. Further Income Tax relief if the shares are sold at a loss, enabling the loss, less any Income Tax relief previously given, to be set against income of the year of disposal, or the previous year.

4. Capital Gains Tax deferral which enables an individual or trust to defer the tax arising on any capital gain by reinvesting the proceeds into an EIS qualifying company. The investment has to take place within three years after the capital gain, or relief can also be claimed against gains arising one year after the investment.

The investor must not be connected with the company, which means that together with his associates (i.e. parents, children and remoter issue such as grandchildren) must not control more than 30% of the shares in the company.

A director or employee of the company is also deemed to be connected with the company and cannot claim the relief, although there is an exception for business angels, as long as they receive no remuneration from the company.

There are also various qualifying conditions that the company needs to satisfy. The company must be unquoted, and must not be controlled by another company.

There is a maximum amount of £2 million that any company can raise under the EIS scheme in any 12 month period, and the money raised must be used for the purposes of the trade within two years of the shares being allotted, or two years from commencement of trading if later. The company must be a trading company and the trade must be conducted on a commercial basis with a view to the realisation of profits. Most trades qualify, but some do not. Those that do not are termed ‘excluded activities’ and include dealing in land, shares or commodities, hotels, nursing homes, legal and accountancy practices, leasing, banking, insurance and a number of other disqualified trades.

Despite all of the qualifying conditions, the EIS provides significant benefits for investors, and should not be overlooked when considering investing in a private company.

To find out more about the Enterprise Investment Scheme, contact Ian Smethurst on 01204 551100.