Guide to Enterprise Investment Schemes & Corporate Venturing Schemes

The Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is designed to encourage investment by individuals in ordinary shares of unquoted trading companies. The scheme allows companies, which meet certain conditions (qualifying companies), to raise funds by issuing full risk ordinary shares to individual investors previously unconnected with the company. The issuing of new shares is often used to fund growth by acquisition and, as such, it is worthy of our consideration. Also those who believe that investing in individual companies could yield higher returns than other asset classes would do well to look at these schemes.

The funds raised must be used for the purposes of a qualifying trade carried on in the UK or for research and development expected to result in such a trade. Such funds must also be used within two years of the share issue.

The Possible Tax Benefits
Four possible tax reliefs are available through EIS: income tax relief; capital gains tax relief; loss relief; and deferral relief.

EIS relief is provisional in the sense that it may be withdrawn or reduced if a subsequent event takes place, which contravenes the conditions governing relief. In broad terms, both the company and the investor must satisfy the relevant EIS conditions for three years from the time the shares in the company are issued. In particular, the investor must not sell the shares or receive value from the company during that period.

Maximum Investment
An individual can invest up to a total of £1m in an EIS company in the current tax year.

(i) Income Tax Relief
A qualifying individual may deduct an amount equal to income tax at the basic rate of tax (currently 20%) on an amount or amounts subscribed for qualifying shares in a qualifying company.

(ii) Capital Gains Tax (CGT) Relief
To the extent that EIS tax relief is given and not withdrawn, any capital gain accruing to an individual investor on the first disposal of eligible shares, which takes place three or more years after the date of issue of such shares, is not chargeable to CGT. What is more any gain on an asset can be deferred by buying EIS qualifying shares. So if you sell your business but still have an appetite for investment in companies then an EIS scheme could be worth considering. Unlike the other reliefs available under EIS, CGT deferral relief is not subject to the annual £1m investment limit. Moreover, it is not subject to the connected persons test outlined below.

(iii) Loss Relief
Where an investor incurs a loss it may be set against taxable income. Alternatively, the loss may be offset against capital gains in the tax year of disposal. Any excess losses can be carried forward for relief against future capital gains.

Who qualifies for relief?
Subject to certain exemptions, to be a qualifying individual for EIS relief, he or she must not be, nor have been within the previous two years, connected with the qualifying company, or become connected with it within the next three years. This means that no relief is available if the aim is to invest and control a business in order to maximise profits. Individual entrepreneurs looking to buy or invest in businesses to turnaround or help maximise profits will not qualify.

(iv) CGT Deferral Relief
Liability to CGT arising from the disposal of any asset may be deferred by investing the capital gain (or part of the capital gain) in eligible shares in a qualifying EIS company. This investment must take place within the period beginning one year before and ending three years after the disposal, giving rise to the CGT liability.

Share this article

Latest Businesses for Sale

---

---

---

View more businesses for sale