Seeds for thought ... the advantages of EIS and Seed EISBy: Sheldon Cole

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (Seed EIS) tax legislation encourages private investors to make equity investments in certain unquoted companies by providing valuable income tax and capital gains tax (“CGT”) reliefs.

In the current economic climate, when bank funding for start-up and expanding companies may prove difficult to secure, EIS may offer a viable alternative. If an individual can claim EIS relief it reduces the net cost of the investment and makes the investment a less risky proposition.

The EIS legislation has been in place for some years now, but from 6 April it has changed to make it a more accessible and attractive proposition. The Seed EIS is a new venture capital scheme introduced from 6 April 2012 for a five year period and will run alongside EIS. Seed EIS is aimed specifically at start-up companies.

The tax reliefs available to investors are generous, but the accompanying legislation is complex and can trip up unsuspecting investors who may fail to qualify for tax relief or could have their tax relief withdrawn.

EIS and Seed EIS can only be used by trading, and not investment, companies. Moreover it is worth noting that certain trades do not qualify under EIS and Seed EIS. For example, property development companies are excluded from qualifying, as are companies operating hotels and care homes, or companies which lease or hire out assets. Nevertheless, property sector trades that are capable of qualifying under EIS or Seed EIS include, for example, companies carrying out contracting, surveying and architecture businesses.

Enterprise Investment Scheme

EIS is targeted at companies with pre investment gross assets of up to £15million and 250 employees. As from 6 April 2012, a company can raise up to £5million annually by issuing EIS shares.

The legislation permits an individual to invest up to £1million per tax year in EIS companies. The tax benefits for the investor include:

• Income tax relief equal to 30 per cent of qualifying investments.
• Gains made on the sale of EIS shares are exempt from CGT where the shares have been held for at least three years and income tax relief has been given and not withdrawn.
• Gains on disposal of other assets can be deferred by making a qualify investment in EIS shares.

Additionally, shares may qualify for 100 per cent Business Property Relief from inheritance tax once held for two years.

Seed Enterprise Investment Scheme

Designed to help start-up companies attract investment, Seed EIS could give investors in new or recently formed small companies a huge 78 per cent tax relief.

Seed EIS is targeted at start-up companies with pre investment gross assets of up to £200,000 and 25 employees. A company can raise up to £150,000 by issuing shares under Seed EIS. To qualify under Seed EIS, the company must either be pre trading or have been trading for a period of less than two years.

The legislation permits an individual to invest up to £100,000 per tax year in a Seed EIS company or companies. The tax benefits of Seed EIS investment to the investor include:

• Income tax relief equal to 50 per cent of qualifying investments.
• Gains made on sale of Seed EIS shares are exempt from CGT where the shares have been held for at least three years and income tax relief has been given and not withdrawn.
• A CGT “holiday” for the 2012/13 tax year worth up to 28 per cent where a gain made in 2012/13 is reinvested in Seed EIS shares also in the 2012/13 tax year.

What this means is that an individual could make a Seed EIS investment of £100,000 in the 2012/13 tax year and save up to £78,000 in tax, making the effective cost of that investment only £22,000.
Both schemes are targeted at encouraging minority investments (no more than 30 per cent of the ordinary shares) in qualifying companies. Shareholdings of greater than 30 per cent do not qualify for the income tax relief or capital gains exemption on sale.

A company seeking to raise money under EIS or Seed EIS should always take appropriate tax and legal advice to achieve the necessary HM Revenue & Customs authorisation and enable the investors to claim the maximum tax relief.

About the author

Sheldon Cole is a Tax Partner at South West accountancy firm Albert Goodman and specialises in advising entrepreneurial companies and their owners on corporate and personal tax planning matters. Sheldon is a keen supporter of Somerset County Cricket Club and can often be found at the County Ground in Taunton or watching his teenage sons play cricket for school and club.

www.albertgoodman.co.uk