Introduction »

Encouraging enterprise

The Enterprise Investment Scheme (EIS) is designed to encourage private individuals to directly invest in smaller high risk unquoted trading companies by offering them attractive tax breaks. The scheme has been running for many years but from time to time the tax incentives and eligible conditions are varied. Now the Government is once more seeking to make improvements to the scheme as part of its ‘Plan for Growth’ announced at the Budget earlier this year. The changes are aimed not only at encouraging individuals to participate in the scheme but also create an opportunity for more companies to be eligible.

Tax breaks for the investor

For investors in shares to obtain tax benefits, the shares must be an investment in newly issued shares of a qualifying EIS company. The benefits potentially available are:

• For shares issued on or after 6 April 2011 income tax (IT) relief is now at 30% (20% for shares issued prior to 6 April 2011), on investments up to £500,000 a year.
• Capital gains tax (CGT) exemption on any gains made on the disposal of EIS shares
• If a capital loss is made on disposal, then some or all of that loss depending on what income tax relief has been obtained is allowable for CGT purposes.
• CGT deferral relief for gains that arise on disposal of any assets against subscriptions for shares in any EIS company.

There are a number of detailed rules that will deny IT relief and the CGT exemption. One key condition for both is the requirement to hold the shares for at least three years.

Another key restriction for IT relief and the CGT exemption but not the deferral relief is connection to the company. If you are connected with the company at any time during the period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of trade if later. You can be connected with the company in two broad ways:

• by virtue of the size of your shareholding in the company or
• by virtue of a working relationship between you and the company.

In both cases the position of your ‘associates’ is also taken into account.

Qualifying companies

Companies must meet certain conditions for any of the reliefs to be available for the investor. In outline these are that:

• The company must be unquoted when the shares are issued.
• 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, generally two years.
• The company or group must have fewer than 50 employees.
• The amount of capital raised in any 12 month period is limited to £2 million.
• The company must not be regarded as an ‘enterprise in difficulty’ under EC guidance.
• The company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK.

Qualifying business activities

A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities include:

• dealing in land, commodities, shares etc
• financial activities
• leasing
• legal or accountancy services
• property development
• farming and market gardening
• operating or managing hotels etc
• operating or managing residential care homes.

Future changes

Legislation will be introduced to make the following changes to the EIS scheme for shares issued on or after 6 April 2012.

• The annual amount that an individual can invest through EIS is to increase to £1 million.
• The annual amount that can be invested in an individual company is to increase to £10 million.
• The thresholds for the size of the company which may benefit from such investment will be increased from:
  - fewer than 50 employees to 250 employees and
  - from an overall maximum of £8 million gross assets to £15 million.

As you can see the schemes have a number of detailed rules. If this is an area you would like further advice on please let us know.

Introduction »