22 October 2018
Over recent years we have assisted many companies and investors in ensuring that investments made qualify for relief under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). In many instances, the relief has been somewhat peripheral as the investment was going to be made in any event, but in other cases, investors have been attracted to the company purely because an investment into it would qualify under one or other of these schemes. The lure of reducing an income tax liability is strong to many, and early stage companies can really benefit as a result.
If an investor has disposable cash of, say, £50,000 and an opportunity to make an SEIS qualifying investment that offers 50% income tax relief, he/she may be inclined to top up the investment with the tax relief available, and take their investment up to the maximum amount covered by the relief - £100,000. It can therefore be seen that the ability to offer investors this relief can mean funding rounds are closed more easily and more quickly.
The headline grabbing features of each scheme are as follows:
SEIS
- 50% Income Tax relief may be available. This requires the relevant amount of tax to have been paid of course, but you are able to relate this to the current year, or if necessary, carry back to the preceding tax year.
- An exemption from capital gains tax (on gains made in the same year as the investment) at the lower of the gain and 50% of the amount invested in SEIS shares may be claimed.
- The shares may be sold with a CGT exemption after they have been held for three years.
- The shares should qualify for IHT Business Property Relief from Inheritance Tax.
- There are limits to the levels of investment that can be made under SEIS. These are £150k per company (lifetime) and £100k per individual (per annum), so it is, as the name suggests, very much aimed at Seed Funding rounds.
EIS
- 30% Income Tax relief may be available. This requires the relevant amount of tax to have been paid of course, but you are able to relate this to the current year or, if necessary, carry back to the preceding tax year.
- The shares may be sold with a CGT exemption after they have been held for three years.
- The shares should qualify for IHT Business Property Relief from Inheritance Tax.
- Investment in EIS shares in the period one year before to three years after the realisation of a capital gain (on another asset) enables the gain on that other asset, capped at the amount invested into EIS shares, to be deferred. The gain remains deferred so long as the EIS shares are held, coming back into charge when the EIS shares are disposed of.
- The limits here are far larger, £5m or £10m per company and £1m or £2m per individual per annum, with a lifetime cap for the company of £12m or £20m (the higher figure in each case applicable to ‘knowledge intensive companies’). So much more suited to companies already in a growth phase, though be aware of a seven year limit from the date that trading started.
So far, so good, but… it is very easy to fall foul of one of the many conditions that are required to be met by the company, the investor, and even what happens to the investment once made. These conditions range from the activities being undertaken by the company, to any connections the investors has with the company or its shareholders, all the way through to a requirement for the money to be spent in pursuit of growth and development. There are all too many pieces of case law where HMRC have successfully argued that one or more of the conditions have not been met.
HMRC have recently updated their guidance on EIS and SEIS and whilst this is very useful in terms of setting the scene, it is vitally important that professional advice is taken throughout a funding round so that you safely navigate what it is something of a minefield.
At UHY, our Corporate Finance and Tax Specialists work closely together to ensure all objectives are achieved. For more information get in touch with your usual UHY contact.
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