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At a glance

The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of Income Tax and Capital Gains Tax (CGT) reliefs to investors who invest in smaller, unquoted, trading companies.

Also see our extended guide for subscribers EIS: Enterprise Investment Scheme (subscriber guide).

The Finance Act 2012 introduced the Seed Enterprise Investment Scheme (SEIS): a scheme like EIS but for start-ups. 

What's New?

Benefits

There are a number of potential tax reliefs associated with EIS.

Income Tax Relief

An individual is able to reduce his tax liability to zero through EIS relief, allowing the taxpayer to claim back any repayable tax deducted at source, such as bank interest or Pay-As-You-Earn (PAYE).

Qualifying conditions

Note that there are several important qualifying conditions attached with EIS Income Tax relief.

1. Restriction for connected individuals

Between the period commencing two years before the issue of EIS shares and the later of three years after the investment was made and the date the company commences trading, an individual investor cannot be ‘connected’ with the qualifying EIS company. They cannot:

*The rights of an individual’s associates are attributed to the individual for the 30% test.

These rules are subject to exceptions for unpaid directors and paid business angel investors which broadly permit payment for services as a director once the shares have been issued. It is advisable to become a director only once shares have been issued. Any director involved in the company's trade prior to issue is likely to be 'connected' and relief will be denied.

See: Case study directors, employees and EIS

2. Three year holding period

The individual must retain the shares for a minimum of three years (or up to five if the trade commenced after the share issue date). If the shares are disposed of within this minimum holding period, the relief will be clawed back (unless the disposal was to a spouse or civil partner, in which case the spouse or civil partner is deemed to have subscribed for them). See note on ‘Relief Clawback.’

3. Investing via partnerships

Investors who invest in start-ups or other small companies through a partnership structure are not eligible for EIS relief.

Capital Gains Tax Exemption

Capital Gains Tax Deferral Relief

Top tip

Loss Relief

Relief Clawback

The clawback of relief works in one of several ways depending on the nature of the disposal.

Qualifying companies

To qualify for the EIS scheme companies must fulfil certain criteria. The issuing company must be:

EIS, takeovers and management buy-outs

In the past, HMRC held the general view that a management buyout cannot qualify for EIS relief due to the prior involvement of the acquiring managers in the trade whose ownership is transferred in the buyout. A recent case indicates that there may be ways around this, see EIS (Subscriber Guide).

Section 247 ITA 2007 provides continuity of EIS relief when an issuing company is acquired by a new company, provided that all the qualifying conditions are met.

Disqualifying activities

All money raised by the issue of relevant shares must be employed wholly for the purpose of the qualifying business activity within a time limit of two years, see EIS (Subscriber Guide) for recent case decisions.

Small Print

The rules on EIS are found in Part 5 of the 2007 Income Tax Act. It is worth the read; many claims to EIS relief fail on what might outwardly appear to be minor technical issues.

Contact Details

The EIS is administered by HMRC’s Venture Capital Reliefs Team

Venture Capital Reliefs Team
WMBC
HM Revenue and Customs
BX9 1BN

Email: This email address is being protected from spambots. You need JavaScript enabled to view it..

Further advice may be sought from the Enterprise Investment Scheme Association (EISA)

EISA: www.eisa.org.uk

 


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