Changes in tax relief for EIS companies and start-ups
“Tax needn’t be taxing,” claims the Revenue. For investors, this mantra rings hollow when navigating the niceties of tax relief. But while the regimes remain complex, the potential benefits repay keeping on top of the detail.
The Government is currently proposing to amend the law on the Enterprise Investment Scheme (EIS), and has introduced a new tax relief for start-up businesses.
EIS – existing position
The EIS scheme was introduced in 1994 to encourage individuals to invest in small private companies that would otherwise have difficulty in raising equity finance. Individuals investing in EIS companies could, if meeting certain conditions, benefit from both income tax relief and capital gains tax (CGT) relief.
|·||Income tax relief – An investor subscribing for shares in an EIS company is entitled to a reduction in income tax liability equal to the amount of tax at the current EIS rate of 30% (20% for shares issued before 6 April 2011). To maintain this relief, the shares must be held for at least three years. An earlier disposal will result in a claw-back of the relief claimed. Investments can be “carried back” against the previous year’s income tax liability, and the applicable rate would be the EIS rate for that previous year.|
|·||CGT exemption – No CGT arises on the disposal of EIS qualifying shares if income tax relief is maintained for three years from the issue of the EIS shares or (if later) from the date on which the EIS company starts trading.|
|CGT deferral relief – CGT liability arising from a disposal of any asset may be deferred by investing all or part of the gain in shares that qualify for EIS relief. The investment must, however, be made within the period starting one year before and ending three years after the disposal. This relief, as well as the relief and exemption noted above, are only available to the original investor (and not to any person to whom the shares are subsequently transferred).|
|·||Inheritance tax relief – 100% inheritance tax relief is available on EIS qualifying shares that are held by a shareholder for at least two years. Unlike the reliefs and exemption above, this relief is available not only to the original investor, but also to subsequent transferees. For this relief to be available, if the inheritance tax liability is triggered by a transfer of shares within seven years before the transferor’s death, the transferee must have retained the shares at least up to the date of transferor’s death.|
EIS – changes
The Finance Bill 2012 makes some changes to the EIS. The table below shows the current position as well as the changes that are due to take effect on 6 April 2012.
|Requirement||Current position||Proposed for 2012/2013|
|Maximum amount an individual can invest in EIS qualifying shares and obtain relief||£500,000||£1 million|
|Maximum amount a qualifying company can raise per annum through EIS||£2 million||£10 million|
|Maximum value of gross assets a company can own before investment to qualify as an EIS company||
£7 million before investment and £8 million after investment
|£15 million before investment and £16 million after investment|
|Maximum number of employees a company can have to qualify as an EIS company||50||250|
|Maximum percentage of capital an investor can hold in the company to obtain EIS relief and not be regarded as being “connected” to the company||
30%, but loan capital is no longer taken into account when calculating this limit
EIS qualifying shares may have preferential rights to income and assets subject to certain conditions.
Shares will be disqualified if:
• any money raised is paid to, or for the benefit of, any party to the arrangement; or
• it would be reasonable to expect that the business would be carried on as part of another business if the EIS arrangements were not in place
Start-ups – the SEIS scheme
The Government also introduced a new scheme in 2011, the Seed Enterprise Investment Scheme (SEIS), as further encouragement for individuals to invest in small businesses. The key requirements for SEIS are as follows:
|·||An individual whose interest in a qualifying company is 30% or less will benefit from 50% income tax relief.|
|·||The 50% income tax relief will also be available to directors who invest in their own company, subject to meeting certain qualifying conditions.|
|·||Any gains realised in 2012/2013 that are invested through SEIS in the same year will be exempt from CGT for individuals.|
||Any gains realised on SEIS shares held for three years or more will be exempt from CGT.|
||Relief will apply to companies whether such companies are currently trading or preparing to trade.|
|·||Individuals are limited to an investment of £100,000 per annum.|
|·||To qualify as a SEIS company, the company must have no more than 25 employees.|
|·||To qualify as a SEIS company, the company must have no more than £200,000 of assets before the investment.|
Whether EIS or SEIS is suitable for a company will depend on both (a) the business intentions and activities of the company and (b) the investment intentions of its potential investors.
In either case, there are clear incentives for individuals to invest in small companies. In particular, media companies are increasingly taking advantage of these schemes, especially where coupled with tax credits that may be available to individuals, which can prove to be an enticing opportunity.
In that sense, tax needn’t be taxing.
Note: the information above is not intended to constitute tax advice and is subject to change. If you are interested in finding out more, we can put you in touch with tax advisers who can provide up-to-date information.