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Date of publication: November 2018

Benefits of EIS

EIS Tax relief is designed to encourage investment in small high risk companies.

  • 30% income tax relief for investor, for investments up to  £1million Relief can be carried back to previous tax year;
  • Shares can be sold, after a qualifying period, free of Capital Gains Tax and shares will normally qualify for relief from inheritance tax too. (The qualifying period is normally 3 years from date of investment or, if trade began later, 3 years from commencement of trade);
  • Capital losses on disposal of shares can be offset against income;
  • Other capital gains can be deferred by investment in EIS shares.

Rules for the company:

  • Cannot be controlled by any other company;
  • Cannot be quoted on the stock market;
  • Gross assets must be less than £15 million  before the investment and less than £16 million after the investment;
  • Must have fewer than 250 full time employees;
  • Must be a trading company, carrying out a qualifying trade, or the parent company of a qualifying trading group;
  • Non-qualifying trades include dealing in land, receiving royalties, certain high asset backed businesses as well as certain professional services;
  • It must be within 7 years of the company’s first commercial sale.
  • Does not have to be resident in the UK, but it must have a UK permanent establishment;
  • The investment must met the risk to capital condition:
    • The company must use the money for growth and development
    • The investment must be a risk to the investor’s capital.
  • Maximum capital raised under EIS and similar tax favourable schemes must not exceed £5 million in any 12 month period;
  • Lifetime limit of £12 million of capital raised
  • Companies can apply to HMRC for assurance that they qualify.

Knowledge Intensive Companies:

  • A number of the requirements and restrictions are relaxed if the company qualifies as ‘knowledge intensive’.
  • Benefits of being a Knowledge Intensive Company:
    • Investor annual limit increases to £2 million.
    • Time limit is within 10 years of first commercial sale or annual turnover over £200,000
    • Annual Investment Limit is increased to £10 million and Lifetime Limit is increased to £20 million
  • To qualify as knowledge intensive the following must be fulfilled:
    • Less than 500 employees at time of share issue
    • Be carrying out work to create intellectual property and expect the majority of your business to come from this within 10 years.
    • Have 20% of employees carrying out research for at least 3 years from the date of investment. These employees must be in a role that requires a relevant Master’s degree or higher.
    • 10% of overall operating costs spent on research, development or innovation each year, or
    • 15% of overall operating costs spent on research, development or innovation in one of 3 years
    • If the company is at least 3 years old, the spend should have been in the 3 years before the investment, otherwise this must occur in the 3 years following the investment. (You will need to submit a schedule, supported by accounts to show that you have)
  • Companies can apply to HMRC for assurance that they qualify.

Rules for the individual:

  • Maximum investment is 30% of share capital. Shares held by associates (close family or business partners) are included;
  • Cannot be a director or employee of the company (an exception is available in certain situations for an unpaid director);
  • It is possible to make an EIS investment through a Fund in order to reduce risk, or through a nominee.

SEIS (Seed Enterprise Investment Scheme):

  • Available to very small start-up companies
    • less than 25 employees,
    • assets up to £200,000;
  • The investor gets 50% of the amount invested as income tax relief;
  • Maximum investment £100,000 per investor;
  • Maximum company can raise is £150,000; and
  • Investors can be company directors but can’t own more than 30% of the company.

FS6

Disclaimer: The information given in this document is for information only and does not constitute investment, legal, accounting or tax advice, or representation that any investment or service is suitable or appropriate to your individual circumstances. You should seek professional advice before making any investment decision. The value of investments, and the income from them, can fall as well as rise. An investor may not get back the amount of money invested.

Past performance is not a guide to future performance. The facts and opinions expressed are those of the author of the document as of the date of writing and are liable to change without notice. We do not make any representation as to the accuracy or completeness of the material and do not accept liability for any loss arising from the use hereof. We are under no obligation to ensure that updates to the document are brought to the attention of any recipient of this material.

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