EIS & SEIS: Reclaiming tax on investments
Individuals can claim 30% or 50% income tax relief on investments made in unquoted trading companies under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) respectively.
The maximum an individual can invest under EIS is £1,000,000 and £100,000 under SEIS, which equates to income tax relief of £30,000 or £50,000. However, please remember that you need to have sufficient income to obtain full relief, so if your total income tax is less than £30,000 (under EIS) you won’t receive the full benefit. In this situation, it may be worth staggering the investment over a number of tax years or maybe splitting the investment with your spouse.
Both schemes are designed to assist start up trading companies to obtain funding which will assist in growing their businesses. Both the company and the investor need to meet strict conditions for the individual to obtain income tax relief on their investment.
The investor must subscribe for new shares; acquiring shares from an existing departing shareholder will not qualify. This is because the funds are not being used for the purposes of growing the business; instead it is merely one shareholder cashing out.
The schemes are designed to assist small start up companies, therefore large or quoted companies will not qualify. The company issuing the shares needs to meet a number of rules about the trading it will be carrying out, number of employees, gross assets and also what the funds will be used for. One of the main pitfalls is that if the trade has previously been carried out by another connected company or for longer than seven years for EIS purposes or two years for SEIS. The rules keep evolving, for example previously it was possible for the company to use the funds to acquire a trading subsidiary and this would have qualified. This is no longer possible; the company issuing the shares must itself use the funds within a certain time period for a qualifying trade.
The type of shares being issued is also critical. The shares must not carry any preferential rights to the investor. If they do, they will not qualify.
The investor must not be connected with the company. An investor is connected with the company if they (together with their associates) own more than 30% of the company. Employees are not allowed to be investors under either EIS or SEIS. Directors can be investors but there are restrictions on what remuneration they can receive from the company. The investor needs to meet the conditions for at least three years. If at any time during the three year period, the investor ceases to meet one of the conditions, any income tax relief will be clawed back. This will also impact upon the capital gains tax position when the qualifying shares are sold.
Provided that all of the conditions have been met throughout the three year period, when the shares are sold then no chargeable gain will arise i.e. any profit made will not be subject to capital gains tax. If, there has been a withdrawal of income tax relief, then some or all of the profit will be subject to capital gains tax.
Capital gains deferral relief is available for EIS shares. This is where, if you have sold another asset at a profit, you are able to defer the chargeable gain until the EIS shares are sold. Under SEIS 50% of the original gain is exempt from tax.
Although the reliefs available are very generous the tax legislation is very complex and it is easy to fall foul of strict conditions.
We hope that the above information is useful.
If you require any further clarification on EIS or SEIS please contact Latha Rodgers below.