It is important to note that the taxation levels, bases and reliefs described in this article are based on existing law and what is understood to be current HM Revenue & Customs practice, which may be subject to change. As far as we are aware, as of the date this article was published (21st August 2018), everything herein is accurate.
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1. What is the purpose of EIS and SEIS?
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are tax relief schemes, designed by the UK government to:
a) Encourage investment in smaller companies which can build intellectual property
b) Increase employment
c) Drive new sectors of the UK economy
2. How do I become eligible for (S)EIS tax relief?
To be eligible to receive (S)EIS tax relief, you must subscribe in cash for fully paid-up ordinary shares in an (S)EIS eligible company. The shares need to be held for a minimum period of three years from the date of issue, or 3 years from when the company begins trading (whichever is later).
You can find out how to claim (S)EIS tax relief by heading to question number 10.
3. Are EIS dividends tax free?
No. Although, shares with preferential rights to dividends may qualify for SEIS relief providing their amount and date of payment is not dependent on a decision by the company, shareholder or any other person and providing the dividends are not cumulative.
4. What kind of tax relief does EIS offer and how much?
Providing the shares are held for three years, Income Tax relief is available at 50%, and the scheme offers exemption from Capital Gains Tax on 50% of the investment. The maximum investment qualifying for relief is £100,000.
If you want to learn about the details of each of these, head down to question 9.
5. How does a company qualify for EIS?
There are a number of conditions that a company must fulfil in order to qualify under the Enterprise Investment Scheme. In brief, the main conditions are as follows:
a) The company or its subsidiary must carry on a qualifying trade which excludes certain financial and so-called ‘passive’ activities.
b) A company does not qualify if its gross assets immediately before the EIS share issue exceed £15m or exceed £16m immediately afterwards. The company must have fewer than 250 employees when the shares are issued, and the maximum amount that can be raised from Venture Capital Schemes is £5m in a 12-month period.
6. What disqualifies a company from EIS?
• Dealing in land, shares, futures and other financial instruments
• Dealing in goods other than in the normal course of a retail or wholesale trade
• Banking, insurance, money lending or other financial activities
• Leasing or receiving royalties or License fees, unless the company has created the intangible asset itself
• Providing legal or accountancy services
• Farming, market gardening, woodlands and timber production
• Property development
• Hotels and nursing homes
• The subsidized generation or export of electricity
• Coal and steel production, shipbuilding
• Providing services to a connected party conducting one of the above trades
• The receipt of Feed-in Tariffs, except for generation by hydro or anaerobic digestion.
If a company fails to meet the conditions in the three years following the investment, or an investor sells or otherwise disposes of the shares, the tax reliefs will be lost.
7. What is the Seed Enterprise Investment Scheme?
The scheme is largely modelled on the long-standing Enterprise Investment Scheme (EIS), but offers enhanced tax reliefs for investment in smaller start-up companies.
The objective is to help start-up companies attract investment by offering tax reliefs to investors. Importantly, tax relief will be available to directors investing in their own companies, subject only to the “30% Test” - they must not hold more than 30% of the ordinary share capital, issued share capital or voting rights in the company.
Additionally, in line with changes to the EIS, shares with preferential rights to dividends will qualify for SEIS relief providing their amount and date of payment is not dependent on a decision by the company, the shareholder or any other person and providing the dividends are not cumulative.
8. What qualifies a company for SEIS?
There are a number of conditions that a company must fulfil in order to qualify under the Seed Enterprise Investment Scheme. These largely mirror the rules for Enterprise Investment Scheme companies, except that SEIS companies must:
• Have fewer than 25 “full-time equivalent” employees;
• Have gross assets of less than £200,000;
• Carry on a genuine new trade;
• Not have raised any money under the DIS or VCT schemes.
9. What tax relief does EIS and SEIS investments entitle the investor to?
There are four elements to the relief offered by the EIS and SEIS investment schemes:
1. Income Tax relief
2. Exemption from Capital Gains Tax
3. Deferral of Capital Gains Tax
3. Deferral of Inheritance Tax relief.
Let’s go through each of these in turn.
a) Income Tax Relief
You can receive Income Tax relief in the year shares were issued so long as your investments do not exceed a £100,000 of SEIS investments or £1,000,00 of EIS investments.
If your investments do not exceed these limits, then you are eligible to receive tax relief of 50% for SEIS investments and 30% for EIS investments in one or more qualifying companies. The tax relief kicks in in the year that the shares are issued.
In the case of SEIS tax relief – funds can be offset against capital returns made in the year. This effectively gives SEIS investors an extra 14% in tax relief.
There are a couple of additional Income Tax benefits offered by SEIS and EIS investments that you might want to know about:
Firstly, for both EIS and SEIS, husbands, wives and civil partners can each subscribe up to the maximum investment per tax year.
Secondly, where an investor subscribes for qualifying shares in the 2018/2019 tax year, a claim can be made to carry back the income tax relief to the immediately preceding tax year, subject to the claim for relief being limited to an amount which reduces the investor’s income tax liability for that year to nil.
You cannot obtain tax relief if you are ‘connected’ with the issuing company. An individual is connected with the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the shares are issued. Relatives, except brothers and sisters, are included in this restriction. Unsurprisingly, partners, directors and employees of the company are connected with it and are therefore not eligible, as are associates, which include business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue.
Additionally, relief might not be available to you if you have taken out a loan which is linked to the investment.
The relief is given against (and cannot exceed) the investor’s individual income tax liability for the tax year in which the shares were issued.
b) Exemption from Capital Gains Tax
If an SEIS or EIS investor sells their shares three or more years after the date the shares were issued or after the date the company started trading (whichever is later) then- so long as they have not received income tax relief- all capital gains are tax free.
If there is a loss on a disposal at any time of shares on which SEIS or EIS tax relief or capital gains tax deferral relief (see ‘4’ below) has been given but not withdrawn, then loss relief against income for gains tax is available provided the relevant requirements of the legislation are satisfied.
SEIS and EIS also give investors flexibility in minimizing and offsetting the costs if they sell their shares at a loss. Specifically: the amount of the loss (once any income tax relief that remains attributable to the shares sold has been deducted) can be set against your gains or taxable income in the year in which the disposal occurs. Also, any excess can be carried forward as a capital loss to be set off against future capital gains.
Alternatively, on making a claim, the loss net of income tax relief may be set off against your taxable income in either the tax year in which the disposal occurs or the previous tax year, against taxable income of the previous year.
c) Capital Gains Tax Deferral
The proceeds of the disposal can be used to defer capital gains tax on UK resident investors by subscribing for qualifying SEIS or EIS shares.
Although exemption from Capital Gains Tax upon disposal is limited to the first £1,000,000 invested, there is no limit on the amount of EIS investments which can be used to defer a gain.
Any deferred gains that are in excess of the exemption will crystallise on the disposal of the EIS shares.
If the investor dies whilst still holding the qualifying shares, the deferred Capital Gains Tax liability is wiped out.
The claim must be made within one year before and three years after the date of the disposal which gives rise to the gain or the date when a previously deferred gain crystallises.
Gains are deferred until there is a chargeable event such as a disposal of SEIS or EIS shares or breach of the SEIS/EIS rules.
To receive Capital Gains Tax deferral, investors must be UK residents or ordinarily resident for tax purposes both at the time of the original gain and at the time the shares are issued, and generally must no become non-resident for three years after the investment or the date the trade commenced (whichever was later).
Once SEIS/EIS shares have been issued, and after the Company has traded for four months, the Company can apply to HM Revenue & Customs to issue tax relief certificates to investors. Its important to note that the time it takes HM Revenue & Customers to grant authorisation is not within the control of the company. Once authorisation has been granted, investors will usually receive certificates of authorisation, which they can submit to the Inspector of Taxes dealing with their own affairs if they wish to claim their relief.
If an investor wishes to treat some of the shares as issued in an earlier year (see above), they have to make separate claim using the EIS 3 certificate. This amends the tax return for those earlier years.
d) Inheritance Tax and Business Property Relief
Investments in SEIS/EIS qualifying companies will usually qualify for Business Property Relief. As long as a shareholder has owned the shares for at least two years at the time of death, 100% Business Property from Inheritance Tax is currently available. Furthermore, there is no upper limit on the amount of Inheritance Tax relief that can be claimed in this way.
10. How can I claim EIS tax relief on my investments?
An EIS3 form is issued by the company selling the EIS shares. If you want to claim tax relief against your tax liability in the year you invest, this is the form you will need for the EIS tax exemptions.
Before claiming your EIS tax relief you should make a note of the companies that you’ve invested in, the amount you’ve invested per company, the date that the company shares were issued and the HMRC office authorising the issue of the EIS3 certificate, including their reference details.
Once you have the above in place, the rest is easy:
1. Go to the section of you tax return titled ‘additional information’
2. Inbox number 2 on page 2, you will need to enter the total amount invested into EIS companies for which you will make a tax relief claim.
3. Go to page 4 and in the large box, where it asks ‘please give any other information in this space’, you will need to enter the information stated in the bullet points in the preparation section of this article.
Claims can be made up to 5 years after you made the investment.
You can go to https://www.crowdfunds.net/investments to see the EIS and SEIS opportunities that Maitland-Smith Crowdfunds is currently offering.
DISCLAIMER The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.