Created in 1994, the Enterprise Investment Scheme (EIS) provides investors with a series of attractive reliefs in return for investing in unquoted companies which may carry a higher degree of risk. How do companies and potential investors qualify to take part in the Scheme?
There are a series of complex rules which govern how companies and individuals can take part in the EIS.
How does a company qualify for the EIS?
- The company must be unquoted – although it may be listed on the AIM / PLUS markets.
- The company must be independent.
- Only ‘small’ companies can join the scheme (i.e. their gross assets must be £15m or less).
- The company must employ 250 people or less at the time of share issue.
- Although most companies will qualify for the EIS, some trades are excluded.
- Companies can raise up to £10m per year from all or any of the three venture capital schemes (EIS, CVS and VCTs).
How does an investor qualify to take part in the EIS?
- Investors cannot have a financial interest in the company. You are connected if you own 30% or more of the share capital, voting rights, or control the company (additional rules apply).
- If you are an employee, partner, or director in the company, you are also connected. However, if you are a business angel or an unpaid director, you may still qualify.
- Any connection between the company and your ‘associates’ is taken into account – including your spouse and close relatives.
- These qualification rules apply throughout the period starting two years prior to the EIS share issue, and three years following the issue.
What tax reliefs are available to investors?
Once again, the tax reliefs available are complex (see HMRC guide here). At a very high level, the benefits for qualifying investors include:
- Income Tax relief at 30%.
- Capital Gains Exemption – if you dispose of EIS share after 3 years, you do not pay CGT on the proceeds.
- Loss Relief is also available, so you can offset any losses against income made in the year of disposal or the previous year.
- CGT Deferral allows you to defer paying Capital Gains Tax if you subscribe to a EIS share offer within 12 months beforehand, or 3 years after the disposal date of the shares which gave rise to the gain.
- From April 2012, investors can invest up to £1m per year in EIS shares.
This article provides a high level guide to the EIS, and you should always seek professional advice before relying on the information provided here.