Enterprise Investment Scheme - The Tax Reliefs Condensed
The Chancellor, George Osborne, has identified the Enterprise Investment Scheme as being an important scheme for encouraging investment in small business. The scheme has been with us since 1994, having taken over from the business expansion scheme but, given the current landscape with regard to obtaining business finance, the government are keen to promote the scheme as an alternative means of promoting business finance.
The Office of Tax Simplification recently identified the EIS scheme as being “four reliefs in one”, so let us remind ourselves what these reliefs are and what changed in the Budget:
1. Income Tax Relief
From 6 April 2012, the investor may invest up to £1,000,000 (combined maximum for Enterprise Investment Scheme and Venture Capital Trust investment) in a tax year and obtain a tax reducer of 30% of the amount of investment. It is possible to carry back the amount paid to the previous tax year. Any amount may be carried back, subject to the overriding maximum for the previous year not being exceeded.
Dividends received are not subject to income tax.
2. Capital Gains Tax Exemption
If the investor has received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years from the date of issue of the shares (or three years from the date of commencement of the qualifying trade, if later), then any capital gain on the disposal of the EIS shares will be exempt from capital gains tax.
3. Capital Gains Tax Deferral
Capital gains realised on the sale of any asset may be deferred against investments in an EIS scheme; the gains crystallise when the EIS investment is disposed of.
4. Loss Relief
If the shares are disposed of at a loss, you can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.
In cases where all of the available tax reliefs are taken advantage of, the total tax reliefs can be as high as 89.5%. For an illustrative example, please click here.
Withdrawal of Relief
One of the biggest problems with EIS is that the tax reliefs will be withdrawn if, during the three year qualifying period, either:
• the investor or an associate becomes connected with the company
• the company loses its qualifying status
• any of the shares are disposed of (unless the disposal is to a spouse or civil partner - in those circumstances the shares are treated as if the spouse or civil partner had subscribed for them)
• the investor (or an associate) 'receive value' from the company (or a person connected with that company). Receiving value is broadly defined and includes receiving a loan or benefit from the company, or receiving an asset from the company at below market value.
There is an obligation to inform HMRC within 60 days of any of the above events occurring.