• Disposal of shares after three years (five years for shares issued before 6 April 2000) is exempt from CGT provided the qualifying conditions are met (“CGT Relief”). Any gains made on the EIS shares are tax free
• Deferral of CGT on other gains until disposal of EIS shares (“Deferral Relief”). This enables any gain to be reinvested in shares issued by an EIS company
Limits on investment
• Subscription in cash for new ordinary shares
• All shares in the same issue must have been issued to raise money for the purpose of the qualifying business activity and must be fully paid up shares
• The new ordinary shares must not carry any preferential rights to dividends or assets of the company on a winding up
• Minimum investment of £500 and maximum of £500,000 per tax year per investor qualifying for Income Tax Relief and CGT Relief. Excess over £500,000 will not qualify for Income Tax Relief or CGT Relief but will qualify for Deferral Relief
• The maximum amount which can be raised by the company through a combination of EIS, Venture Capital Trusts (“VCTs”) and the corporate venturing scheme is £2,000,000 in any year
• Company or group must have gross assets of less than £7 million before and £8 million immediately after the EIS investment. These limits apply for Deferral Relief as well as Income Tax Relief and CGT Relief
• The Company or group must have less than 50 full time equivalent employees at the time of the EIS investment
• The company must start trading within two years of the investment
• Cash raised by the investment used in a qualifying trade as to 80% of the amount within 12 months of the issue of shares or the commencement of the trade and the balance within two years of the issue of the shares or the commencement of the trade
• No relief will be given if pre-arranged exits have been arranged for investors
Qualifying company
• Unquoted (AIM and OFEX companies are treated as unquoted)
• Preparing to carry on or carrying on a qualifying trade during the period of three years from the issue of shares or the commencement of trade
• Alternatively acting as a holding company of qualifying companies or making loans to qualifying subsidiaries
• Must not be controlled by another company and a connected individual or be a 51% subsidiary of another company
• Must not have subsidiaries unless the company holds not less than 90% of the issued share capital and voting power in the case of subsidiaries that will obtain funds raised by the parent company, and the subsidiaries carry on the qualifying trade so that the group as a whole does not carry on non-qualifying trades that form a substantial part of the group’s business. Therefore, up to 20% of the group’s business may be in non-qualifying trades. Other non-active companies must be at least 51% subsidiaries
• Where the investment money is used to acquire another company, it must hive up the trade as soon as reasonably practicable after the acquisition.
Qualifying trade
• Carried out in the UK
• Conducted on a commercial basis with a view to realisation of profits
• It does not include a substantial part of the trade in the following activities:-
dealing in land, commodities, futures, shares, securities or other financial instruments;
dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;
banking, insurance, money lending, debt factoring, money purchase, financing or other financial activities;
oil extraction activities;
leasing or receiving royalties or licence fees (certain exceptions for letting commercial ships on charter, film production and research and development) unless the IP is “self-created”;
provision of legal or accountancy services;
property development;
farming or market gardening;
holding, managing or occupying woodlands and any other forestry activities or timber production;
operating or managing hotels;
operating or managing nursing homes or residential care homes;
ship building;
producing coal;
producing steel;
provision of services or facilities for any trade carried on by another person consisting of the above activities;
• A “substantial part of the trade” is taken by HM Revenue & Customs as over 20% of turnover or income
Investor qualifications
• Apply for Income Tax Relief and CGT Relief only
• The investor must not be connected with the company for a period of two years before the issue of shares or between incorporation and issue if less, and for a period of three years after the issue of shares (subject to the exceptions below)
• “Connected” means the individual or his associates
(a) must not be an employee or director (unless you are a “company doctor”) or partner of the issuing company;
(b) must not be connected with the issuing company or have been an employee of any person who previously carried on the trade carried on by the company;
(c) must not acquire more than 30% of:-
(i) the issued ordinary share capital;
(ii) loan capital and issued share capital; or
(iii) voting power in the company.
Associate includes husband or wife, parent or remoter forbear child or remoter issue or partner of the investor or trustees of a trust established by the investor but not the brother or sister of the investor
• The investor can hold the subscriber shares when the company has not commenced or made preparations to commence any trade
• A company doctor may be a paid director of the company. The issue of shares must be made before the individual becomes a paid director of the company and any remuneration must be reasonable in relation to the services rendered to the company. Other payments must be on a commercial basis for goods or services supplied to the company. A company doctor is still able to make further investments in the next three years without prejudicing their relief.
Withdrawal of relief within three years of issue
• Transfer or disposal of shares to a third party (transfers between husband and wife are permitted)
• Failure by the investor to retain qualifying status
• Loss of qualifying company status (during the 3 year period from the issue of shares) including acquisitions of non-qualifying subsidiaries
• Receipt of value by the investor from the company at any time one year before and three years after investment including:-
Repayment of repurchase of shares, repayment of any debt owed to the individual incurred after investment where the repayment of the debt is pursuant to arrangements made in connection with the acquisition of the shares;
Waiving of any liability due to the company;
Making a loan to the investor;
Providing a benefit or facility to the investor;
Transferring an asset or acquiring an asset involving the investor at an under value.
• Receipt of value by some other person for example, the company purchasing any of its share capital, subject to a number of very limited exceptions.
• Exemptions exist for the following:
- Reasonable remuneration
- Reasonable dividends
- Reasonable rent, interest payments etc.
- Payments of insignificant value (less than £1,000 or a higher amount that is insignificant by reference to the amount invested)
Other issues
• No relief will be available if any pre-arranged exits exist in relation to the shares or the business/assets of the company.
• The investor may wish to investigate the possibility of carrying back up to half of his investment (subject to a maximum of £50,000) to the previous tax year if the issue of shares is made before 6 October in the current tax year.
Procedure for obtaining relief
1 Company can obtain advance assurance from HM Revenue & Customs regarding qualifying status before investments are made
2 Investors invest money for subscription of shares
3 After trading or carrying on research and development for at least 4 months company submits form EIS1 to HM Revenue & Customs (within 2 years of the end of (a) the year of assessment of the investment or (b) the 4 month period)
4 HM Revenue & Customs issues form EIS2 to the company (notification of qualifying investment) and forms EIS3 for each qualifying investor
5 Company issues form EIS3 to each qualifying investor
6 Investors make claim for EIS relief on self assessment tax return enclosing the form EIS3 (within 5 years of the 31 January following the year of assessment of the investment)
Updated May 2008.