For individuals, the ability to make tax efficient investments has probably never been more important. Fortunately, two Government-backed schemes can help.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are two Government-backed schemes that allow private investors, smaller trading companies, and start-ups to invest in a tax efficient manner.
What do you need to know?
The EIS gives significant tax reliefs to investors where they are subscribing for newly issued shares in certain qualifying companies. The maximum investment per year is £1m and investors can claim Income Tax savings at 30% of the amount invested. Provided that qualifying conditions are met, including those relating to the minimum period of investment (being broadly three years), gains made on the disposal of shares which have qualified for Income Tax relief are exempt from Capital Gains Tax (CGT). Furthermore, if proceeds from the sale of other assets are re-invested in EIS shares, the gains on those assets can be deferred until the EIS shares are sold. If a capital loss is made on the sale of EIS shares, that loss can still relieve income and gains of the investor.
The tax relief is intended to generate investment in qualifying companies and to compensate (to a degree) for the inherently risky nature of these investments. Indeed, a requirement of the legislation is that there must be a genuine risk to the investors’ capital.
There is no requirement for a company issuing shares under the EIS rules to be a UK company. Relief can still be available if a non-UK company has a UK permanent establishment. Funds raised by EIS investment must be used, generally within two years of investment, in a qualifying trade, preparing to carry on a qualifying trade, or in research and development that may lead to a qualifying trade. A company can raise up to £5m each year and £12m across its lifetime from EIS investment (these limits are raised for ‘knowledge intensive companies’). In general, EIS investment needs to be received within seven years of a company’s first commercial sale in order to qualify for relief.
Employees and directors (and their relatives) of a company are unable to qualify for EIS relief. However, the legislation allows ‘business angels’ to become directors after they have made their investment.
SEIS is aimed at smaller, early-stage companies and typically start-ups. It operates in a similar manner to EIS but there are some key differences. The maximum investment that an investor can make each year is £100,000 and qualifying companies can only receive a maximum lifetime investment of £150,000. SEIS investments are eligible for Income Tax relief at up to 50% of the investment and gains on the disposal of SEIS shares are generally exempt from CGT if the shares have been held for three years.
Reinvestment relief offers the chance to exempt up to 50% of a chargeable gain on the sale of other assets where a qualifying SEIS investment is made during the same tax year.
Subject to certain conditions, directors of a company can make SEIS investments provided they receive reasonable remuneration. Employees cannot make SEIS investments in their employer.
EIS and SEIS are valuable reliefs which are used by many investors. The reliefs are provided for by UK tax legislation and are not considered aggressive. It should be noted that both reliefs are subject to extensive conditions, not set out above for brevity, relating to the company invested in, the investors themselves, and the type of shares acquired. The underlying rules are quite prescriptive and advice should be taken before making, or relying upon the tax reliefs of any EIS or SEIS investments.
What should you do next?
If you would like to know more about EIS or SEIS or how you can make use of these valuable reliefs, please get in touch with your usual Blick Rothenberg contact or Tim Shaw, using the details on this page.