EIS is OK: Pt 1
What is EIS?
The Enterprise Investment Scheme ("EIS") has been around
since 1994. It was introduced at a time when small businesses were
finding it difficult to access funding from banks. In the current
economic climate it is worth looking again at EIS.
EIS is underutilised because its rules are complex. The
rules were re-written in simpler language, but they still span over
100 sections of the Income Tax Act 2007.
It is almost impossible for the average businessman to read
the legislation and understand exactly how EIS works. That is a
great pity. There are significant tax savings that can be made by
The aim of this article is to de-mystify the rules of EIS. A
subsequent article will highlight how Rollits LLP can help secure
the benefits of EIS.
Who might be interested in EIS?
1. Companies seeking investment.
2. Individuals looking to make investments in unquoted
What are the benefits of EIS?
EIS provides significant tax breaks for the investor. EIS
actually comprises three reliefs:
1. Income tax relief equal to 20% of the amount invested, so
each £100 of investment only costs the individual £80;
2. Complete exemption from capital gains tax (CGT) on the
sale of EIS shares; and
3. The deferral of CGT on a gain made in the period
beginning one year before and ending three years after the
investment in EIS shares.
An individual is entitled to EIS relief on investments up to
£500,000 per year. That would give an income tax saving of
£100,000. When combined with no CGT on the sale of the shares, EIS
is a relief worth having!
How can you qualify for EIS?
In order to qualify for EIS income tax relief, certain
conditions must be satisfied in respect of:
1. the shares;
2. the investor; and
3. the issuing company.
EIS shares must be subscribed for wholly in cash and fully
paid up at the time they are issued.
The purpose of the issue must be to raise money for the
preparation of a trade or the carrying out of a trade by the
issuing company or its subsidiaries.
The money raised must actually be used within two years
after the EIS shares have been issued for the purpose of preparing
to carry on a trade or actually carrying out a trade.
There can be no pre-arranged exits (like put and call
options over the shares) at the time the shares are
The individual investor must have no "connection" with the
issuing company to qualify for EIS income tax relief (this rule is
relaxed for EIS CGT deferral relief). This condition must be
satisfied (broadly speaking) in the period beginning two years
before the issue of shares and ending three years after the issue
The investor will be treated as connected with the issuing
1. she is an employee of it or any of its subsidiaries;
2. she is a director of it or any of its subsidiaries (but
see the "business angels" section below for the relaxation of this
3. she holds or is entitled to acquire more than 30% of its
ordinary share capital or the loan capital and issued share capital
of the company.
The investor cannot sell her shares or enter into
arrangements to sell them before (broadly speaking) three years
after she acquires her EIS shares. The investor can receive
dividends in that period provided they are no more than a normal
return on the investment. If the investor has made a loan to the
issuing company then reasonable interest can be received in respect
of that loan.
An investor can qualify for EIS even if she becomes a
director after acquiring her EIS shares provided that:
1. she was not previously connected with the issuing company
or involved in carrying on its trade; and
2. she only receives remuneration which is reasonable given
the services rendered to the issuing company or its
It might be possible for an executive who is buying into a
company to obtain EIS Relief on her investment. Unfortunately, the
business angels rule does not help an incumbent manager in a
management buy out situation.
The issuing company must be carrying on a trade or preparing
to carry on a trade.
The trade cannot be any of those on a blacklist. The trades
on the blacklist include: dealing in land, leasing, providing legal
or accountancy services, property development, farming and market
gardening, the operating or managing of hotels and the operating or
managing of nursing homes or residential care homes. When the
legislation was drafted the activities on the black list were
thought not to be risky enough to merit EIS relief.
The issuing company cannot be quoted or have any
arrangements in place to become quoted.
The company cannot be a subsidiary or under the control of
another company either at the time of issue or (broadly speaking)
at any point in the three years following the date of
The gross assets of the company cannot exceed £7m (or that
of the parent company and it subsidiaries if it is part of a group)
before the EIS or £8m after it.
The company cannot have more than 50 full-time equivalent
employees. This rule was introduced in 2007.
Not so complicated after all?
If you are interested in EIS relief or have any other tax
issues, please contact Nasim Sharf on 01482 337336, email
Posted on: 11/03/2011
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.
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