An investor can take advantage of either or both of these schemes.
Income Tax Relief
Investors may be given Income Tax relief at 30% on their investments of up to £1,000,000 a year (one million pounds).
Please note that this relief cannot be set off against dividend income, as the tax credit attached to dividends is not recoverable. Where an investor subscribes for qualifying shares before 6 October in a tax year, a claim may be made to carry back one half of the amount subscribed to the previous tax year, subject to a maximum of £50,000. The Income Tax relief is withdrawn if the Enterprise Investment Scheme shares are disposed of within three years.
Tax Loss Offset
Should the value of Enterprise Investment Scheme shares diminish, losses can be offset against Income Tax or Capital Gains Tax.
If EIS shares are disposed of at any time at a loss (after taking into account Income Tax relief), the loss can be offset against capital gains or income in the year of disposal or previous year. For losses offset against Income Tax, the net effect is to limit the investment exposure to 42p in the £1 for a 40% tax payer, if the investor realises a total loss. Alternatively, any such losses can be offset against Capital Gains Tax at the prevailing rate.
Capital Gains Tax Exemption
Gains on the disposal of EIS shares are exempt unless the Income Tax relief is withdrawn. The CGT exemption may be restricted if an investor does not get full Income Tax relief on the subscription for Enterprise Investment Scheme shares.
Losses on the disposal of Enterprise Investment Scheme shares are allowable. The amount of the capital loss is restricted by the amount of the EIS Income Tax relief still attributable to the shares disposed of.
A capital loss arising on the disposal of EIS shares can be set against income.
Capital Gains Tax Deferral
Gains arising on disposals of any assets can be deferred against subscriptions for shares in EIS. Shares don't have to have Income Tax relief attributable to them in order to qualify for deferral. The gain becomes chargeable in the tax year when the EIS subscription shares are disposed of. There is no upper limit on the amount of deferral relief available to an investor although there is a limit on investment in a single company or group of companies. In other words, this relief is not limited to investments of £1,000,000 per annum. Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the Enterprise Investment Scheme investment or less than 12 months after it. As a result, an investor could have a total tax saving and deferral of 60% of their investment.
All shares must be paid up in full, in cash or by cheque, when they are issued. They must be 'full-risk' ordinary shares, with no preferential rights to dividends, or to the company's assets in the event of a winding up. There must also be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements for the shares to be purchased by anyone else after the end of the relevant period.
Companies must meet certain conditions for any of the reliefs to be available for the investor.
- The company must be unquoted when the shares are issued and there must be no arrangement in existence at that time for it to cease to be unquoted. Accolade intends to remain unquoted.
- All the shares comprised in the issue must be used to raise money for the purpose of a qualifying business activity. Accolade will invest these funds by developing web-based internet trading.
- The money raised must be wholly employed within a specified period by the company.
- The company or group must have fewer than 50 full time employees.
- The amount of capital raised in any 12 month period is limited to £2 million.
Qualifying Business Activities
A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:
- Dealing in land, commodities, futures, in shares, securities or other financial instruments
- Financial activities
- Dealing in goods other than in an ordinary trade of retail or wholesale distribution
- Leasing or letting assets on hire
- Receiving royalties or licence fees, (other than, in certain cases,) such payments arising from film production, or from research and development
- Providing legal or accountancy services
- Property development
- Farming or market gardening
- Holding, managing, or occupying woodlands
- Operating or managing hotels, guest houses or hostels
- Operating or managing nursing homes or residential care homes
- Ship building
- Coal and steel production
Time Period in which the Money is Invested
In most cases at least 80% of the money must be used within 12 months after the date on which the shares were issued and the remaining balance within the following 12 month period. Where the qualifying business activity has not started: the company must begin to carry on trade within 2 years after the issue date of the shares; the above deadline is extended to 12 months and 24 months after the date on which trading commences.
How to Qualify for Income Tax Relief
Eligibility for Income Tax relief is restricted to companies with which you are not 'connected' at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.
You can be connected with a company in two broad ways:
In both cases the position of your ‘associates’ is also taken into account.
- by virtue of the size of your stake in the company or
- by virtue of a working relationship between you and the company.
Size of Stake
You will be connected with the company at any time when you control directly or indirectly possess, or are entitled to acquire, more than 30% of the ordinary share capital of the company.
You will be connected with the company if you have been an employee or a paid director. There is an exception to this rule if you become a paid director of the company after you were issued with the shares. Qualifying investors can in certain circumstances be paid for their work, provided the total remuneration package is 'normal and reasonable'
You must never previously have been connected with the company and must not become connected with it in any other way.
Also, you must never have been involved in carrying on the whole or any part of the trade or business carried on by the company.
How to Qualify for CGT Deferral Relief
You can defer a chargeable gain which accrues to you on the disposal by you of any asset. In addition, you can defer revived gains arising to you in respect of earlier EIS, Venture Capital Trust (VCT) or CGT reinvestment relief investments.
There are some restrictions on investments against which gains can be deferred. These are designed, broadly, to prevent relief being obtained in circumstances where there is a disposal and acquisition of shares in the same company.
Inheritance Tax Exemption
EIS Investments are generally exempt from Inheritance Tax two years after making the investment.
Receiving Value from a Company
The Enterprise Investment Scheme is subject to a number of rules which are designed to ensure that investors are not able to obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.
Examples of the circumstances in which you would be treated as receiving value are:
Receipts of ‘insignificant’ value will not cause the withdrawal of relief.
- Where the company buys any of its shares or securities which belong to you.
- Makes a payment to you for giving up the right to payment of a debt (other than an ordinary trade debt).
- Repays a debt owed to you that was incurred before you subscribed for the shares.
- Provides you with certain benefits or facilities.
- Waives any liability of yours or an associate’s to the company.
- Undertakes to discharge any such liability to a third party.
- Lends you money which has not been repaid before the shares are issued.
For users of the above notes:
This material is published for information. It provides an overview of the regulations in force at the date of publication, but no action should be taken without consulting the detailed legislation or seeking professional advice.
Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author(s) who compiled the data. Accolade Partnership Ltd, 17 October 2014.
An Enterprise Investment Scheme is the best way of exploiting tax breaks.
Isle of Skye
Photo taken by Bill Gray,
Managing Director @ Accolade,
Sunday May 1st 2011
"He either fears his fate too much,
Or his deserts are small,
That puts it not unto the touch,
To win or lose it all."
Extract from 'My Dear and Only Love' written in 1643 by James Graham, Marquis of Montrose.
Original text & images are Copyright to Accolade Office- europe Limited © 2015
Original images have been pixellated with a pattern that makes them identifiable as the unique copyright property of Accolade Partnership Ltd. © applicable within all legal jurisdictions, worldwide.
. Page last modified :