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VCT and EIS
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Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) was introduced as a replacement for the Business Expansion Scheme. In 1998 a unified EIS was announced, incorporating capital gains tax reinvestment relief.
What benefits does the Enterprise Investment Scheme provide the investor and companies wishing to raise new finance?
The investor
The investor can expect:
- Income tax relief at the 20% rate of tax on the amount invested in qualifying investments of up to £200,000 per annum. The EIS relief may be withdrawn if certain events occur within three years, e.g. shares sold
- Any gain arising on a disposal of the shares after three years to be free from capital gains tax
- Deferral of capital gains (no limit) on any other assets, by reinvesting all or part of the gain into an EIS company within one year before, or three years after, the gain accrued. The deferred gain becomes chargeable to capital gains tax if certain events occur later
- Relief for any losses made on the disposal of EIS shares against capital gains tax or, in some circumstances, income tax
- The opportunity to participate in the running of the business and to receive reasonable remuneration for doing so
As a result of the above, an individual could have a total tax saving and deferral of 60% of his investment.
The qualifying company
- The company can enjoy the opportunity to raise finance, either for initial start-up or for expansion
The main condition is that the scheme be limited to companies with gross assets of less than £15 million before, and no more than £16 million after, the investment.
Outline of the scheme rules
Throughout its relevant three-year qualifying period, the company must:
- Be an unquoted company
- Have only fully-paid issued shares
- Be a trading company, carrying on a qualifying trade, wholly or mainly in the UK
- Exist for genuine commercial purposes, and not be part of a scheme for the avoidance of tax
- Not be a 51% subsidiary of another company, or otherwise be under the control of another company
In addition:
- An investor cannot be 'connected' with the EIS company, i.e. he or she cannot own more than 30% of the shares, directly or indirectly
- Individuals who are paid directors or employees of the EIS company at the time of the issue of shares are normally disqualified from claiming EIS relief. Otherwise, qualifying investors can in certain circumstances be paid for their work, provided the total remuneration package is 'normal and reasonable'
- The money raised by the EIS share issue must be wholly used for the qualifying business activity
- Schemes that involve guarantees or exit arrangements will not attract tax relief
Qualifying trades
The definition of qualifying trades is quite extensive, but certain activities (such as most dealing operations, banking, leasing, legal, and accounting services) are specifically excluded, as are those considered to be 'asset backed' (farming, forestry, property development, hotels, and nursing homes).
Spreading your risk
Investors who do not want to put all their eggs into one basket could consider an EIS approved investment fund or a Venture Capital Trust (VCT).
Approved investment funds are collective investment vehicles employing a fund manager to invest subscribers' money in qualifying companies. The fund manager brings together the total investment of a number of investors over a number of companies.
Comparison between VCT and EIS.
Conclusion
The scheme is becoming more and more popular, and currently there appear to be more potential investors than there are opportunities. As may be expected, the tax breaks have been introduced by the Government to encourage would-be investors in what, given the nature of the investment companies concerned, must be inherently risky ventures. However, readers with an entrepreneurial spirit, surplus cash, and the appetite for a handsome payback at shorter odds than winning the national lottery jackpot, may be interested to learn more.
We would be pleased to help in any way we can.
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