Personal
Tax
Enterprise
Investment Scheme
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 £200,000 a year (£150,000 up to 5 April
2004).
- For
share issues after 5 April 2000, the income tax relief is
not withdrawn provided that the shares are not disposed
of within three years (five years for share issues prior
to 6 April 2000).
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tax relief is withdrawn.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.
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
- leasing
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' at any time during a ‘four year
period’. The four year period begins one year before
the date of issue of the shares and ends three years after
that date.
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You
can be connected with a company in two broad ways:
- by
virtue of the size of your stake in the company or
- by
virtue of a working relationship between you and the
company.
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In
both cases the position of your ‘associates’ is
also taken into account.
Size of stake
You will be connected with the company at any time when you
control directly or indirectly possess, or are entitled to
acquire, more than 30% of the ordinary share capital of the
company.
Working relationship
You will be connected with the company if you have been an
employee or a paid director of the company.
There is an exception to this rule if you become a paid director
of the company after you were issued with the shares.
You must never previously have been connected with the company
and must not become connected with it in any other way. Also,
you must never have been involved in carrying on the whole
or any part of the trade or business carried on by the company.
How
to Qualify for CGT Deferral Relief
You
can defer a chargeable gain which accrues to you on the disposal
by you of any asset. In addition, you can defer revived gains
arising to you in respect of earlier EIS, Venture Capital
Trust (VCT) or CGT reinvestment relief investments.
There are some restrictions on investments against which gains
can be deferred. These are designed, broadly, to prevent relief
being obtained in circumstances where there is a disposal
and acquisition of shares in the same company.
Receiving
Value from a Company
The
EIS is subject to a number of rules which are designed to
ensure that investors are not able to obtain the full benefit
of EIS reliefs if they receive value from the company during
a specified period. If relief has already been given, it may
be withdrawn.
Examples of the circumstances in which you would be treated
as receiving value from the company are where the company:
- buys
any of its shares or securities which belong to you
- makes
a payment to you for giving up the right to payment of a
debt (other than an ordinary trade debt)
- repays
a debt owed to you that was incurred before you subscribed
for the shares
- provides
you with certain benefits or facilities
- waives
any liability of yours or an associate’s to the company
- undertakes
to discharge, any such liability to a third party
- lends
you money which has not been repaid before the shares are
issued.
Receipts
of ‘insignificant’ value will not cause the withdrawal
of relief.
How
We Can Help
It
is not possible to cover all the detailed rules of the scheme
in a factsheet of this kind. If you are interested in using
the EIS please contact us if you need further information
about the scheme.
We can advise you as to whether your company has a qualifying
trade.
We can also help to guide you through the implementation of
a scheme which is suitable for your circumstances.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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C o m p l e t
e 
Regulated
to carry on audit work for a range of investment business
activities by the Institute of Chartered Accountants in England
and Wales