EIS and SEIS are two tax relief schemes available to companies. Which scheme is most appropriate for your company can depend on the size of your business and what phase of growth the business is in.
What is EIS?
Enterprise Investment Scheme (EIS) is a scheme developed to help small high-risk trading companies raise finance by offering tax reliefs to investors who subscribe for new shares.
For companies to qualify for the scheme certain conditions need to be met for up to 3 years from the time of the investment as not doing so can end up in tax relief not being given to investors or if this has already occurred, withdrawal of the relief.
· Shares must be unquoted at the time when they are issued and there must be no prearrangement for the shares to eventually become quoted on a recognised stock exchange.
· Another company cannot control a company wishing to qualify and cannot control any subsidiaries it has. The value of gross assets should not exceed £15m before the share issue and £16m after. It must have at least 250 employees at the time of the share issue and 500 if it is a knowledge intensive company.
· It must have a permanent establishment in the UK. Within 2 years of the share issue all money raised must be used by the company or by a 90% qualifying subsidiary solely for the purpose of a qualifying activity. It can carry on some excluded activities (for example dealing in land, commodities, financial instruments and goods other than in an ordinary trade of retail or wholesale distribution) however this can only be a maximum of 20% the company’s total activities.
· Qualifying companies and their subsidiaries cannot take more than £5m of EIS or other risk investment in a year. No more than £12m can be taken in total; this amount is £20m for a knowledge intensive company.
Requirements for Investors
· An investor cannot have a connection with a company in order to claim relief. Having a financial interest in a company can make someone connected. If an investor holds more than 30% of the share capital or voting rights and is entitled to more than 30% of the assets in the occurrence of closing down the company then he/she will be deemed as having a connection by financial interest. This condition is for 2 years before and 3 years after the issuing of the shares, if not 3 years after the start of qualifying trade if this is later.
· Investors cannot be partners, directors or employees of the company as this is deemed an employment connection. This limitation has the same time window as a connection through financial interest. However, there is an exception for directors who are Business Angels who do not receive remunerations who may qualify for Income Tax relief. If they become a paid director during the 3-year window the tax relief will not be withdrawn as long as the remuneration is reasonable.
Requirements for Shares
· When the shares are issued they must be paid up in full in cash and they must not be full-risk ordinary shares nor be redeemable.
· An investor cannot acquire the shares in question using a loan offered on terms and conditions that would not have been in place for any other shares.
· There must not be arrangements in place for the investor that would protect him/her from the usual risks associated with investing in shares and there must be no strategic alliances where the company owners agree to similarly invest in each other to obtain the tax relief.
EIS offers potential relief in Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT).
Income tax reducer
For Income Tax a reducer of 30% is used against the lower of the cost of shares or £1m. For shares issued before 6 April 2011 the reducer is 20%. Carry back of relief is available for one tax year provided the limit was not exceeded that year.
EIS Reinvestment Relief
For CGT relief, EIS Reinvestment Relief is available to defer all or part of a capital gain arising on any asset as long as the proceeds are reinvested in EIS shares. The amount that can be deferred is the lower of the gain, the amount reinvested and a specific amount claimed. Unlike for Income Tax relief there is no limit. A gain will be charged when the shares are sold.
Where there are losses, this is allowable even if the shares were not owned for the full 3 years. An investor can claim to use the loss against net income instead of a capital loss.
2017/18 tax year
Income Tax relief: 30%
Limit for relief: £1m
CGT deferral relief limit: ∞
Business Property Relief
Business Property Relief (BPR), a relief available from IHT, applies to lifetime gifts and shares in the death estate as long as it has been owned for 2 years. If the beneficiary becomes entitled to the shares on the death of a spouse or civil partner, the 2 years after the investment is made counts towards the requirement. In some cases if the investment lasts less than 2 years relief is still available.
If the shares are sold before the end of the 3 year period, claw back will be the lower of the original incomes tax reducer and if made a loss, sale proceeds x rate of the initial relief. Any gains that were previously deferred will now become taxable in year of sale. In instances where a fraction of the shares were sold, only that fraction of the gain is taxable.
EIS3 forms are used to claim the relief. A claim cannot be made until they receive the EIS3 form from the issuing company and this can be done 5 years from 31 January after the end of the tax year when the shares were issued.
Seed EIS (SEIS) helps very early stage companies therefore the tax reliefs are greater.
· Another company cannot control a company wishing to qualify. The company’s gross assets should not exceed £200k or exceed a limit of 25 employees at the time of the share issue.
· Qualifying companies cannot take more than £150k of SEIS or other risk investment in total. This total includes other de minimis state aid received in the prior 3 years.
· At the point of investment any trade carried on must be less than 2 years old and the company must not have carried on any other trade before this. Within 2 years of the share issue all money raised must be used solely for the purpose of a qualifying activity. Former funds raised through the EIS or Venture Capital Trust (VCT) schemes are prohibited. A minimum of 70% of funds raised on any shares issued before 18 November 2015 has to be spent before any EIS shares are issued.
Requirements for Investors
· Once again an investor cannot have more than 30% of the share capital or voting rights, this will be from the incorporation date up to 3 years after the share issue.
· Investors cannot be associates or employees of the company, up to 3 years after the share issue. However, for SEIS a director is not deemed connected as an employee but would be deemed if owned more than 30% of the shares in the company.
For Income Tax a reducer of 50% is used against the lower of the cost of shares or £100k.
SEIS Reinvestment Relief exempts 50% of the capital gain arising on any asset from CGT. The 50% exemption is on the lower of the gain on any asset, amount of income tax relief claimed and any other amount.
2017/18 tax year
Income Tax relief : 50%
Limit for relief: £100k
CGT deferral relief limit: 50%