Enterprise Investment Scheme EIS

The Enterprise Investment Scheme, EIS,  was introduced to encourage investment in small and medium enterprises.  These strategies are only open to individuals, and the shares of the investment must be purchased in cash.
There are various tax reliefs available to potential investors, which are designed to encourage investment into these types of opportunities, which otherwise may struggle to secure funding.

The maximum taxation relief which is available is £500,000 per tax year, and an investment can be carried back to the previous tax year, in addition to the current tax year at the time which the investment is made.

There are two broad types of EIS investment opportunities:
-          Companies – An EIS Company, must have a maximum capitalisation of no more than £2 million at the time of inception.
-          Fund – An EIS Fund must have a maximum capitalisation of no more than £7 million at the time of inception. An EIS fund will then go on to invest in a number of EIS Qualifying Companies on your behalf.

Investment into an EIS Company, must be into a “small company”, the definition of which is as follows:
A gross assets test, where the gross assets of the Company cannot exceed £7 million immediately before any share issue, and £8 million immediately after shares are issued.

There are different types of EIS Investments available, these include, direct investment into trading businesses, business angels, media, property and land based investments, and a whole lot more and there are a whole host of different businesses strategies which range from the “lower risk”, right up to high risk, high reward strategies.

If you are looking to invest in an EIS Company, you will need to consider the following:
-          What is your risk profile – i.e. Are you in a position where you could potentially lose all of your investment
-          What type of returns are you looking for? If you are looking for a high return, then the risk is likely to be higher. Target returns will normally be included in the Memorandum which will be published to attract potential investors
-          The track record of the operator and management team – Are the people running the Company experienced? Do they have a track record? If you are looking at a “lower risk” strategy, these things are particularly relevant, however, it is important to consider these factors for all EIS investment opportunities
-          The Exit – Typically EIS Companies will not have an easy exit from an investment perspective, as the volume of the shares and volume of trades is likely to be extremely small. Therefore after the minimum investment period, it may not be possible to exit the investment strategy, even if the Company has performed extremely well.

An EIS Company cannot have a pre determined exit, however, the operator and management will normally be able to advise as to their potential exit options at the end of the investment period. It may well be, that if the investment strategy has been successful, that all of the investors will want to reinvest. However, some investors financial situation may have subsequently changed in the meantime, and as such they may want to get their funds returned to them.

Investors will receive income tax relief on 20% of the amount invested, this is offset against an investors income tax bill when they come to do their tax return. So for example, if an investor is to invest £10,000, then they would be able to offset £2,000 against their income tax bill for either the current or previous tax year.

For income tax relief to apply, investors would need to hold their shares for a minimum of three years, otherwise their previous income tax would fall due. In addition, the Company in which investors choose to invest, will need to continue a “qualifying trade” for a minimum of three years from the date of investment.

In addition, investors are able to roll Capital Gains which have been incurred into an EIS Company. So for example if an investor has exited a significant shareholding or sold some property which had increased in value over a period of time from the initial purchase price, then they could roll this gain into an EIS Company. This creates a deferral of the Capital Gain, meaning that it would only be at the point when the gain is crystallised that the Capital Gains Tax would be incurred.

Where a positive return is generated through investment in an EIS Company, upon the subsequent exit, this return would not be subject to Capital Gains Tax.

Investors can also benefit from Inheritance Tax Relief, providing they have held their shares for a minimum of 2 years prior to the date of their death.

It is possible that if an investor is to invest in an EIS Company, and if the value of the shares which the investor purchases’ subsequently drop, it is possible for investors to claim share loss relief, on the price which they paid for their shares, providing that the Company has continued a qualifying trade for the required period.

HMRC will provide what’s known as “advance assurance”, or “pre approval” to EIS Companies. What this means is that the Company will submit an application to HMRC providing an overview of the proposed business strategy of the Company. HMRC will then decide if this falls into the “qualifying criteria”. As such, the Company will need to continue to trade for the three year period, otherwise the various tax reliefs may be at risk.
It is possible for an EIS Company to conduct an element of its trade which is “non-qualifying”. However, this can be no more than 20% of the trade of the business.
Some EIS Companies will proceed without being “Pre Approved”, this is becoming increasingly common particularly with EIS funds. Where a fund has previously traded on the same or similar basis, the operator and management team may take a view that their investment strategy is not contentious and will be confident that they will receive the various tax reliefs when applied for.
This is worth considering, as a “pre approved” Companies strategy will have been reviewed by HMRC, who will normally state, that providing the Company trades in the manner described in the documentation presented to the HMRC, then tax reliefs should apply. If an EIS Company is not approved, it is possible that at the point of applying for the tax reliefs that these may be not be available.

Investors will need to provide an EIS3, this is the certificate which can be completed and sent to HMRC to prove that an investor has invested and subsequently has made a qualifying investment.
When the Company commences trading, it will complete an EIS2  and submit this to HMRC. HMRC will then send back an EIS2 certificate.  The Company will then issue EIS3 certificates to investors, which will need to be returned and submitted to HMRC.  Your claim can then be made as part of the self assessment tax return for the current tax year.  If you invest through an EIS fund, they will issue an EIS5.
Where you have received an EIS3 for the current tax year, in which you have not yet received a tax return, it is possible to contact your local tax office to request that they change your tax code.

Veracity financial planning is not responsible for, nor does the Financial Services Authority regulate advice given with regard to taxation matters regard to trusts; some aspects of tax advice; commercial mortgages or second charge secured lending.
“The value of your investment can fall as well as rise and you may get back less than you pay in.”