EIS Tax Reliefs

To obtain the EIS tax reliefs described below, it is necessary to subscribe for Shares in EIS Qualifying Companies and where appropriate to claim the relief. The summary below is based on current law, and gives only a brief outline of the tax reliefs. It does not set out all the rules which must be met by EIS Qualifying Companies and an Investor. The tax reliefs will only be relevant to Investors who are liable to UK income tax and/or wish to defer a capital gain.

(a) Income Tax Relief

Individuals can obtain 30% income tax relief on the amount subscribed for Shares in EIS Qualifying Companies (up to an annual maximum £1 million for the 2018/2019 tax year), although relief will be denied for investment into an EIS Qualifying Company with which the individual is connected. Spouses and civil partners can each separately subscribe up to £1 million but they will not be able to jointly own more than 30% of the share capital and voting rights in a single qualifying EIS company.

The relief is given against the individual’s income tax liability for the tax year in which the Shares are issued unless the individual makes a carry back relief claim providing the £1 million annual investment limit has not been exceeded in that tax year. Relief is limited to an amount that reduces the Investor’s income tax liability for the year to nil.

As announced in the Autumn Budget 2017, for shares issued on or after 6 April 2018, the maximum annual investment limit has increased to £2 million provided that any amount over £1 million is invested in one or more ‘knowledge-intensive’ companies.

(b) Carry Back Relief

Carry back relief claims may be made for amounts subscribed for Shares in EIS Qualifying Companies, such that an investment is treated for tax relief purposes as having been made in the tax year before the tax year in which the investment was actually made. In effect, and provided no 2017/2018 EIS investments have already been made, this allows an investor to invest up to £2 million in 2018/2019 and claim full tax relief (over 2017/2018 and 2018/2019), or £3m provided at least £1m has been invested in knowledge intensive companies in 2018/2019.

(c) Capital Gains Tax Deferral

To the extent to which a UK resident Investor (including individuals and certain trustees) subscribes for Shares, he can claim to defer payment of tax on all or part of a chargeable gain. The gain may have arisen on the disposal of any asset, or a previously deferred gain may have been brought back into charge. Although there is a limit for income tax relief (see (a) above) and for the exemption from capital gains tax upon a disposal (see (d) below), there is no limit on the amount of EIS qualifying investments which can be used to defer a gain. If the Investor dies whilst still holding Shares, the deferred CGT liability is extinguished entirely. Shares in EIS Qualifying Companies must be issued within one year before and three years after the date of the disposal which gives rise to the gain or the date upon which a previously deferred gain crystallises. The gain is deferred until there is a chargeable event such as a disposal of Shares or a breach of the EIS rules.

For gains made from 6 April 2016 onwards, CGT has been charged at 10% and 20% for individuals (the applicable tax rate depends on the total amount of the individual’s taxable income and will be 20% for an individual liable to higher rates of income tax (18% and 28% for certain residential property assets)); and 10% for gains qualifying for Entrepreneurs’ Relief (subject to a maximum lifetime limit of £10 million).

When a previously deferred gain crystallises, the rate of CGT then payable will depend upon the legislation that is in force at that time, and may be greater or lower than the rate that would have applied had Capital Gains Deferral not been claimed. If Entrepreneurs’ Relief was available on the gain deferred on a disposal which occurred on or after 3 December 2014, it will also be available when the gain comes back into charge.

(d) Capital Gains Tax Exemption

Any capital gains realised on a disposal of EIS qualifying Shares after the Three Year EIS Period, and on which EIS Relief (see (a) above) has been given and not withdrawn, will be free from capital gains tax. Any capital gains realised on a disposal within the Three Year EIS Period will be subject to CGT.

(e) Loss Relief against income or gains

Unrestricted tax relief is available at any time in respect of any loss realised upon a disposal of EIS-qualifying Shares on which EIS income tax relief (see (a) above) has been given and not withdrawn. The amount of the loss (after taking account of any income tax relief initially obtained) can be set against the individual’s gains in the tax year in which the disposal occurs, or, if not fully used, against gains of a subsequent year. Alternatively, on making a claim, the loss net of income tax relief may be set off against the individual’s taxable income of either the tax year in which the disposal occurs, or the previous tax year. If the circumstances are such that EIS income tax relief have been withdrawn, it may still be possible for an investor to claim an amount of loss relief but these will be subject to a limit of £50,000 or 25% of adjusted total income.

Where only CGT Deferral relief has been claimed, loss relief against income tax may be restricted due to the cap on income tax reliefs.

(f) Inheritance Tax – Business Relief

Although not an EIS tax relief as such, an investment in an EIS-qualifying Company will normally qualify for 100% relief from IHT under current legislation, provided the investment has been held for at least two years and is still held at time of death. There is no upper limit on the amount of IHT relief which can be claimed.

Date for claiming tax relief

The relevant dates for income tax relief, from a tax year perspective, are the dates on which Investments are made into each of Investee Companies, rather than the date in which an Investor may have subscribed into an EIS Fund. The latest date an Investor can file a claim for EIS relief is five years after 31 January following the tax year to which the claim relates.

EIS3 certificates

On investment into each Investee Company the Investee Company applies on your behalf to HMRC for EIS Relief for your investment. The application to HMRC cannot be made until the Investee Company has carried on its trade for a minimum of four months. Subject to this, EIS3 certificates are typically sent out to investors by the Custodian within a few months of each underlying investment depending on when the forms are received from HMRC.

The EIS3 certificate enables you to claim your income tax relief and capital gains tax deferral, normally by making the appropriate entries on your own tax return. It should be noted that the Investment Manager nor the Investment Adviser have any control over the availability of the associated EIS certificates. For the avoidance of doubt the Investment Manager, Investment Adviser or Custodian will not be liable for any loss suffered in respect of the timing or non-issue of the EIS certificates.

EIS Qualifying Companies

Each Investee Company must initially (i.e. at the time of issue of the Shares) not be listed on a recognised stock exchange  (as defined for the purposes of EIS Relief) and there must be no “arrangements” in place for it to become so listed. In addition, throughout the Three Year EIS Period, it must not be a subsidiary of, or be controlled by, another company. It must either exist to carry on a qualifying trade or else be the parent company of a trading group and there must be no “arrangements” in existence for the Investee Company to become a subsidiary of, or be controlled by, another company.

A trading group is a group in which, directly or indirectly, more than 50% of the shares of each subsidiary are held by another member of the group, but any subsidiary employing any of the money raised by the issue of Shares must be a qualifying 90% subsidiary. Non-qualifying business activities (broadly, investment activities and non-qualifying trades) must not comprise a substantial part of the business of the group as a whole. The qualifying business activity for which the money is raised by the issue of Shares must be a trade conducted on a commercial basis and with a view to the realisation of profit.

Although it is possible for qualifying activities to be carried on anywhere in the world, the company that issues the shares must have a “permanent establishment” (broadly, a taxable presence) in the United Kingdom.

For EIS purposes, the value of the gross assets of the Investee Company and any subsidiaries must not exceed £15 million immediately before the issue of Shares and £16 million immediately afterwards. The maximum EIS fundraising per Investee Company is restricted to an all-time maximum of £12 million (£20 million for “knowledge-intensive” companies). The relevant shares must be issued to raise money for the purpose of a qualifying business activity so as to promote business growth and development. Employing money raised on the acquisition of an interest in another company, which is or becomes a 51% subsidiary of the company, a trade or goodwill or intangible assets employed for the purposes of a trade does not amount to employing money raised for the purpose of a qualifying business activity.

The maximum EIS fundraising (including any other investments under a tax-advantaged scheme) per Investee Company is restricted to £5 million per year, or £10 million per year for “knowledge intensive” companies. The maximum number of fulltime employees (or full-time equivalent) in the Investee Company at the time of Investment is restricted to fewer than 250 (fewer than 500 employees for ‘knowledge-intensive companies’).

Most types of trades are qualifying trades for EIS purposes but the following are excluded:

  • Dealing in land, commodities or futures, or in shares, securities or other financial instruments;
  • dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution, or acting as a wholesaler or retailer of goods of a kind which are collected or held as investments if stock is not actively sold;
  • banking, insurance, money lending, debt factoring;
  • hire purchase financing or other financial activities;
  • leasing, except certain lettings of ships, or receiving royalties or licence fees (subject to certain exceptions, most particularly in relation to self-generated intellectual property);
  • providing legal or accountancy services;
  • farming and market gardening;
  • holding, managing, or occupying woodlands or forestry or timber production;
  • property development;
  • shipbuilding;
  • producing coal and/or steel;
  • operating or managing hotels or similar establishments;
  • operating or managing nursing homes and residential care homes;
  • generation or export of electricity or power;
  • production of gas or fuel; and
  • providing services to a trade consisting of any of the above carried on by a “connected person.”

For EIS generally, companies whose first commercial sale was made more than seven years ago (or ten years ago for a “knowledge intensive” company) cannot receive EIS monies. Companies “in financial difficulty” cannot receive EIS investment. HMRC’s guidelines regard a company as being in financial difficulty where it is unable, whether through its own resources or with the funds which it is able to obtain from its owners, shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term. The guidelines indicate that a company will not be regarded as being in financial difficulty within its first three years’ trading.

Shares only qualify for EIS Relief if they are ordinary shares which do not, at any time during the Three Year EIS Period, carry any present or future preferential right to dividends (other than to certain fixed rate non-cumulative dividends) or to an Investee Company’s assets on its winding up, or any present or future right to be redeemed.

An Investor can obtain EIS income tax relief only in the tax year in which investments in Qualifying EIS Companies are made, or in the immediately preceding tax year.

Please note that this is only a condensed summary of the taxation legislation and should not be construed as constituting advice which a potential Investor should obtain from his or her own investment or taxation adviser before applying for any. The value of any tax reliefs will depend on the individual circumstances of Investors.

EMV Capital does not give tax advice and recommends that you consult a tax adviser regarding the technical aspects of the EIS legislation.

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