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EIS Relief - Better Than Ever Before

EIS Relief - Better Than Ever Before

For a number of years the Enterprise Investment Scheme has provided business investors with some of the most generous tax reliefs on offer.  As a result of the govenment's increasing desire to encourage investment in small and new start-up companies, the existing rate of EIS income tax relief has been increased and a new relief has been introduced, specifically aimed at start-up businesses.

Enterprise Investment Scheme

As part of the Chancellor's 2011 "open for business" budget, he announced that with effect from 6 April 2011 the rate at which income tax relief is granted on qualifying EIS investments will increase from 20% to 30%. Furthermore, from 6 April 2012 the maximum qualifying amount an investor can make in a tax year will rise from £500,000 to £1m. As a result the maximum income tax relief on qualifying investments becomes £300,000.

In addition to income tax relief, qualifying EIS investments also provide two very valuable capital gains tax reliefs. One is a deferral relief on gains made on the disposal of other assets. The second is an exemption from capital gains tax arising on gains made on the EIS shares themselves. Both of these reliefs are subject to meeting certain qualifying criteria. Furthermore, in the vast majority of cases the EIS shares will attract business property relief which exempts them from Inheritance Tax once the shares have been owned for 2 years.

Seed Enterprise Investment Scheme (SEIS)

This new scheme will provide income tax relief at the rate of 50% on qualifying investments made after 31 March 2012. The aim of this is to promote investment in new businesses. To qualify the investment must be in a new business, which must be a genuine new venture. In addition the company must have fewer than 25 employees, it must be unquoted, and it must have assets with a value of less than £200,000 at the point of investment. The maximum amount of investment is £100,000 (meaning maximum income tax relief of £50,000), and the maximum amount a company can raise under this scheme is £150,000.

Qualifying SEIS investments will provide the investor with an exemption from capital gains tax arising on assets realised in 2012/13.

The result of these provisions is a possible rate of tax relief at 78%.

Investments

In light of the significant tax benefits associated with these two schemes it is no wonder that both small and new start-up companies wishing to attract investment, and those looking for an investment opportunity are anxious to ensure that EIS/SEIS qualifying status can be achieved.

The rules for both schemes apply restrictions to the availability of tax relief, These restrictions include the company's trading activities, the type of shares issued, and the usage of the funds raised by the investment. One key rule that often stands in the way of EIS income tax relief is that the individual cannot be connected with the company before the investment. Broadly an individual is connected if they or an associate (in most cases any relative) of theirs owns more than 30% of the company, or is an employee of the issuing company or any of its subsidiaries.

An investor is not precluded from this relief by virtue of being a director so long as he/she is paid on normal commercial terms. This enables business angels to invest and obtain the relief and still take an active role in the business after the investment.

The SEIS scheme will not disqualify directors from investing in their own companies so long as they do not exceed the 30% limit.

By nature in their basic format EIS/SEIS qualifying companies can be small high risk ventures, and therefore, to many the tax benefits associated with a qualifying investment are a means to mitigate the risk of the investment itself. Whilst this is a valid view, many will see EIS/SEIS investments as having significant return potential. Many small companies have solid business plans, firm foundations and/or high growth potential, meaning that the tax reliefs afforded to qualifying investments could be viewed as being an added bonus to a business investor confident in the investment opportunity.

With correct structuring EIS/SEIS relief can be obtained by many business angels on investments in companies in which they will have an active involvement after they have made their investment. This allows the business angel access to the tax reliefs and a measure of control over their investment's performance.

In April we shall be presenting a seminar about tax efficient business structures and this will include a discussion as to the availability of EIS/SEIS tax relief, and how to structure the business and investment in the best way possible to obtain these valuable reliefs.

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