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In the continuing constrained lending environment, securing affordable finance to fund future development and expansion plans can be problematic. Using the Enterprise Investment Scheme (EIS) may be one possible route to get round the problem.
EIS was launched to assist unlisted UK trading companies seeking financial backing, and, provided EIS investors satisfy various conditions, they can claim a range of tax reliefs both on their initial subscription and on any future sale of the EIS shares. With the value of the reliefs available being concentrated by the current income and capital gains tax rates, it is important to consider the value of the EIS reliefs set out below:
Income Tax Relief: An income tax credit of up to 30 per cent is available on the first £1 million of qualifying subscription in new shares of an EIS company, and can be claimed in the year of subscription or the previous year.
Capital Gains Tax (CGT) Exemption: EIS shares held for a minimum three year period can be sold free of capital gains tax, as long as any income tax relief has not been previously withdrawn. Should a capital loss arise on the shares, it is reduced by any income tax relief given on the initial subscription and thereafter can be used to reduce capital gains tax elsewhere or “converted” into an income loss to reduce income tax liabilities in the year the loss arose, or the previous year.
Capital Gains Tax Deferral: Chargeable gains arising on any asset can be “reinvested” into EIS shares, deferring the capital gains tax liability which would otherwise arise. The EIS investment must be made within one year before and three years after the chargeable gain arises.
Points to remember
Qualifying conditions - to secure these reliefs, conditions must be met by both the company and the individual, and the legislation surrounding this area becomes complex. It’s possible to fall foul of these labyrinthine rules without even realising it.
Using the reliefs - EIS tax credits can only be set against income tax liabilities in the year the investment is made, or those of the previous year, subject to the annual subscription limit, with any unused surplus relief being lost. The same applies when claiming a capital loss as an “income” loss.
Obtaining a tax refund – the EIS tax credit reduces your income tax liability, causing tax already paid to be repaid, or reducing tax which would otherwise fall due. You must therefore have an income tax liability in order to use the relief. The net result may be a refund, a reduction in the amount due for the year, or a reduction in future payments on account, or a combination of these.
Deferral relief - the capital gain is being deferred and not eradicated and will become taxable when the EIS shares are sold in the future, at the rate applying at that time (unless the deferred gain is reinvested into further qualifying investments).
Entrepreneurs' Relief (ER) – where applicable, deferred gains cannot obtain EIS deferral relief and ER, and investors are faced with choosing either a 10% rate now or a deferred liability at 18%, 28%, or possibly a higher rate, in the future.
Withdrawal of relief – relief is reduced or withdrawn if the company or investor ceases to qualify for EIS status, and care should be taken to avoid this happening on either part.
In the March 2012 Budget, the Seed Enterprise Investment Scheme (SEIS) was announced. It works within the same framework as the existing EIS rules, and can apply to shares issued on or after 6 April 2012. The main differences to note on the SEIS are:
Where the relevant conditions are met, it is possible to utilise the SEIS rules and then move on to the standard EIS arrangements, giving investors two levels of tax savings.
EIS and SEIS investments can provide attractive tax incentives both now and in the future, and we can help and advise you, from completing the relevant application paperwork all the way through to providing a fully bespoke service, being involved in every step of the process to ensure that you don’t fall foul of the complex tax legislation involved. For more detailed advice on these or any other tax issues, please contact Fiona Donaldson or Ian Haynes at Springfords on 0131 440 5000. Alternatively, see www.springfords.com