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Curating Tomorrow’s Growth
Enterprise Investment Scheme
History
The Enterprise Investment Scheme (EIS) is a government initiative, introduced in 1994, created to encourage investment in small and medium sized companies which by their nature are generally considered high risk. By investing in new shares in these companies, private investors can enjoy a range of tax reliefs, which are designed to help lower the overall risk profile of the investment.
Background
Instead of being structured as a pooled investment, EIS “funds” commonly refer to a collection of investments in EIS qualifying companies, purchased on behalf of investors under the terms of a discretionary management contract. The investee companies will be chosen to fit the parameters of a common investment policy. To qualify for EIS benefits, a company must meet many criteria as defined by HMRC. The company must be an unquoted company at the time the shares are issued. That means it cannot be listed on the London Stock Exchange or any other recognised stock exchange. It can subsequently become a quoted company without the investors losing relief, but only if there were no arrangements for it to become quoted in existence when the shares were issued. For the EIS rules the Alternative Investment Market (AIM) and the PLUS Markets (with the exception of PLUS-listed) are not considered to be recognised exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all the other conditions. The PLUS-listed market is regarded as a recognised stock exchange and shares listed on that market at the time of issue will not qualify for EIS.
EIS Benefits:
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tax free capital growth
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income tax relief at up to 30%
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up to 100% relief from inheritance tax after two years
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potential for additional income tax relief on losses
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potential for Capital Gains Tax deferral
In order to maintain the tax benefits available under EIS, an investor must hold their shares for 3 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in a withdrawal of the tax reliefs.
Being an equity investment, investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. Given that small companies can take time to grow, and an exit may not be immediately apparent for shareholders, EIS investments should be considered long-term investments, being at least three years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest.
Seed Enterprise Investment Scheme
History
The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012 and is designed to help small, early-stage/start-up companies with new trades to raise equity finance by offering a range of tax reliefs to individual investors who subscribe for new shares in those companies.
Background
It complements the existing Enterprise Investment Scheme which continues to offer tax reliefs to investors in higher-risk small to medium sized companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS. The income tax relief rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS. SEIS funds are not technically pooled investment vehicles but rather a series of investments in individual SEIS qualifying companies which are collectively referred to as a ‘fund’. In effect the management team behind the fund provide a discretionary investment management service within the parameters of a common investment policy for all investors. SEISs and SEIS funds are not quoted on the Stock Exchange.
SEIS Benefits:
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tax free capital growth
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income tax relief at up to 50%
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capital gains tax reinvestment relief (investors can benefit from 50% capital gains tax relief on gains which are reinvested in SEIS eligible shares)
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up to 100% business property relief (BPR) from inheritance tax after two years
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potential for additional income tax relief on losses
In order to maintain the tax benefits available under SEIS, an investor must hold their shares for 3 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in a withdrawal of the tax reliefs.
Being an equity investment, investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. Given that small companies can take time to grow, and an exit may not be immediately apparent for shareholders, SEIS investments should be considered long-term investments, being at least three years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest.