Tax Efficient Investing
EIS & SEIS Investing Explained
The Enterprise Investment Scheme (EIS) is a Government run initiative aimed at providing private investors with a range of tax reliefs if they subscribe for qualifying shares in qualifying companies. Meaning that higher risk Small and Medium (SME) sized businesses can raise finance. The scheme allows for private investors to create a diverse portfolio of start-up and early stage businesses of their choice. The funds raised must be used for a qualifying trade, preparing to carry out the qualifying trade or to undertake R&D that will lead to a qualifying trade more information can be found on the HMRC website.
EIS Fund vs Direct EIS Investing
As a direct investor you will receive the tax advantage straight away as you will not have to rely upon the fund manager. You can select, build and manage your own portfolio choosing to have as much or as little involvement in each company as you and the Company agree to. You can establish a direct relationship with the company compared to the fund manager being involved. As a direct investor you have more control over the terms and SA agreements. An EIS fund will mean that the investment manager will carry out due diligence on the investor’s behalf.
EIS Fund vs VCT Fund
Venture Capital Trust (VCTs) are companies similar to investment trusts which invest in unquoted SMEs. They usually look at funding later stage companies. EIS funds raise funding from individual investors and institutions for investing in a range of EIS- eligible companies. EIS funds are a great way to obtain funds for business growth at the earlier stage of the company. An investor must hold a VCT for five years as opposed to three years for EIS funds to be eligible for tax relief. Tax relief for an EIs fund can be applied to the current and previous tax year whereas the VCT fund must be applied in the current tax year. Only £200,000 can be invested in VCTs each year compared to the £1m that can be invested in EIS funds.
Tax Advantages of EIS Investing
- Income tax relief – reduction of their income tax liability by up to 30% of the amount invested
- Capital Gains Tax – None payable on the disposal of shares after 3 years. CGT can accrue over a longer period of time.
- Inheritance Tax Relief – Business Property Relief for Inheritance tax purposes at a rate of up to 100% after 2 years.
- CGT Deferral Relief – CGT can be deferred for as long as the EIS qualifying shares are held
- Loss Relief – if shares are disposed of at a loss this can be offset against the investor’s capital gains or income in the current of previous year of disposal.
Important to Note
Below are a few items to take note of when considering to invest in an EIS eligible venture. This is not an exhaustive list and financial advice is recommended before progressing with an investment.
- Individual cannot have over 30% interest in the Company for income tax relief to apply.
- EIS qualifying investment must be held for at least 3 years from the date of issue.
- Maximum subscription in any given year is £1m for income tax relief purposes.
- Income tax relief is limited to the amount which reduces the individual’s income tax liability for the year to nil.
- CGT deferral relief is unlimited therefore it is not limited to investment of £1m per year and can be claimed if interest in a company exceeds 30%.
- Regarding loss relief and losses offset against income the net effect is to limit the investment exposure to 38.5p in £1 for a 45% taxpayer. If offset against capital gains it will be at a rate of 28%.
Advantages to a Company looking for investment
Using the Enterprise Investment Scheme can really help raise funds to grow or develop your business by incentivising investors.
It can provide connections with investors that have sector specific or generally business insight to help advise and accelerate your companies growth. It is always advised that advanced assurance should be obtained from HMRC to ensure that the investment is likely to qualify.
Additional details on how to do this can be obtained from the HMRC website.
The maximum investment that you can make as an investor using the EIS scheme is £12m. The venture company may qualify for EIS if it has fewer than £15m in gross assets, less than 250 employees or it is within 7 years since the first commercial sale. The EIS funds generated must be spent within two years of being invested, the funds cannot be used to buy another business and must pose a risk of loss of capital to the investor. The company must have a permanent establishment in the UK and not be trading on a recognised stock exchange. If your Company owns or controls any other companies, they must be qualifying subsidiaries to be considered for EIS.
Below are a range of figures regarding EIS investment calculated by HMRC:
- Since 1993-94 27,905 individual companies have received investment
- Since 1993-94 £18 billion of funds have been raised
- In 2015-16 number of investors claiming income Relief on Self-assessment forms under EIS is 35,360
- In 2016-17 number of investors claiming income Relief on Self-assessment forms under EIS is 29,860 (likely to increase as reporting date has been moved forward compared to previous years)