The tax reliefs under the Enterprise Investment Scheme (EIS) for investing in small company shares have been enhanced from 6 April 2011, with 30% income tax relief now available.
With small businesses finding it increasingly difficult to raise finance through the banks, seeking external investors could be well worth considering. The EIS scheme offers some fantastic tax reliefs to investors which make investing in small (and generally high risk) companies attractive, so if you want to attract investors in your business you should considering applying to use the scheme.So what are the tax reliefs for the investors? In a nutshell these are:
- 30% income tax relief on the value of your investment which can be claimed in either the tax year of investment or the previous tax year.
- No Capital Gains Tax to pay on any increase in value of the shares once held for 3 years.
- Deferral of Capital Gains on (any) assets where the proceeds are invested in EIS shares.
- Income tax relief for any losses on EIS shares.
The income tax relief was increased from 20% to 30% from 6 April 2011. As a result an investor buying shares for £10,000 will be able to claim back £3,000 of income tax, effectively reducing their investment/risk to £7,000. Income tax relief is available for investments of between £500 and £500,000 per tax year in qualifying EIS shares.
For investments in shares to qualify for the reliefs under EIS there are a number of qualifying criteria that both the investor and the company must meet, namely:
- Must not own more than 30% of the shares in the company (for 2 years prior to the investment being made and for 3 years after).
- Must not be an employee or Director of the company (exception for Business Angels).
The above tests apply to the investor themselves and their ‘associates’ which includes their spouse or civil partner, their parents and grandparents, and their children and grandchildren, plus also their business partners. So, taking the 30% test above, it means that the investor and all of their associates must not own more than 30% of the shares in the company between them. Similarly for the employee or Director test the investment will not qualify for EIS relief if the investor or any of their associates are a Director or employee of the company.
However, in contrast to most other tax legislation, siblings are not treated as associates making it possible for a Director’s brother or sister, for example, to invest in the company and obtain the tax reliefs. Equally parents-in-law could invest in a business with EIS relief available.
- Must be an unquoted trading company.
- Must not be carrying on an ‘excluded trade’ (see below).
- Must have fewer than 50 employees.
- Must not be in financial difficulty (essentially must be solvent).
- Must have gross assets of less than £7m before the investment and less than £8m after.
- Must be raising no more than £2m pa from any share issue.
The EIS rules do not allow the tax reliefs for investments in companies that carry out certain trades. The list of excluded trades is quite extensive and includes: property development; accounting and legal services; hotels; nursing homes; and certain financial activities including insurance.