On the Eleventh day of Christmas the Taxman gave to me ….. a tax free investing opportunity!
The Enterprise Investment Scheme (‘EIS’) offers tax relief to individuals who invest in new shares in unquoted trading companies. If you are looking to make investments or to raise money for your company, the EIS might be the answer. There are three main reliefs available:
- Income tax relief;
- Capital gains tax exemption; and
- Capital gains tax deferral.
Income tax relief is given at the rate of 30% on the cost of the shares and is set against your income tax liability for the year in which the investment is made or it can be carried back to the previous tax year, if desired.
The maximum investment on which relief can be claimed is £1m each tax year and there is no minimum investment.
The shares acquired must be newly issued by the company and the money raised must be used for trading purposes.
Investors must not hold more than 30% of the share capital in the company and this includes shares held by relatives such as your spouse, parents or children but not your siblings for example. An investor cannot be an employee of the company either but they can be on the board of directors.
The shares must be held for at least three years to ensure income tax relief is not withdrawn. If they are held for three years, on a subsequent disposal, any gain on the shares will be exempt from capital gains tax. If the investment fails and you make a loss, it is possible to set the loss against income arising in the year of disposal or the previous year.
Where an individual has made a capital gain on any asset, they can invest the proceeds into EIS shares, subject to time limits, and defer the tax on that gain until the EIS shares have been sold. This relief is available even if you own as much as 100% of the company you are investing in and, as announced in the Autumn Statement, it is now possible to preserve Entrepreneurs’ Relief (a 10% tax rate) on such deferred gains.
The company invested in must be a trading company but some trades are specifically, including property development, farming, hotels and nursing homes. The company must be unquoted (although AIM listed companies may still qualify) and the gross assets of the company must not exceed #15m prior to the share issue.
The Seed Enterprise Investment Scheme (‘SEIS’) is a baby version of the EIS designed for new startup companies. It works in a very similar way to EIS but income tax relief is given at the rate of 50%, although the maximum SEIS investment each year is limited to £100,000.
The rules for EIS and SEIS are complex. Both the company and the investor must satisfy a whole host of conditions in order to qualify. Professional advice is essential.
If you need any advice or would like to chat this through please call me on 01772 821021 or contact me at [email protected] .
Please return tomorrow for our final posting in this 12 tax reliefs of Christmas.