The Enterprise Investment Scheme
The Enterprise Investment Scheme is designed to help smaller trading companies to raise finance by offering a range of tax reliefs to investors who purchase newly issued shares in those companies. More specifically, investors can receive substantial income tax, capital gains tax, and inheritance tax relief by investing in qualifying companies. This translates into such companies being able to tap a significant source of private capital on relatively attractive terms.
To qualify for EIS, companies must meet the following criteria (some of which are currently subject to approval by the European Commission)
Cannot be a subsidiary, or be controlled by, another company (there are exceptions)
Company cannot be listed on a recognised stock exchange or have “arrangements” to be listed. Aim-listed companies can qualify.
The qualifying business activity for which the money is raised by the share subscription must be based in the UK
The trade must be conducted on a commercial basis and with a view to the realisation of profit
Annual individual company investment limit of £10 million
Gross assets cannot exceed £15 million before investment
Must have fewer than 250 full-time employees (or their equivalents) at the time the shares are issued
Some trades are excluded (including, but not limited to some types of property companies, residential care homes, some financial instruments, hotels, farming)
Rules for investors
Investment must be in shares with no preferential rights
No single investor may own over 30% of the share capital at any time
An investor must invest for a minimum of 3 years, otherwise tax reliefs are subject to clawback
Annual investment limit of £1 million
The investor must have paid or be liable for UK tax to get the refund
Benefits to tax payers
30% immediate income tax relief
Ability to carry back income tax relief one year
No Capital Gains Tax on disposal of shares
Tax relief allows investors to set off any losses against income if the business is unsuccessful
No inheritance tax after 2 years
Capital Gains rollover relief (capital gains tax on other investments can be deferred)