The Enterprise Investment Scheme (‘EIS’) is a tax relief scheme introduced by the Government to encourage investment in start-up & early stage businesses. Through providing tax reliefs the scheme is attractive to investors, therefore making it easier for companies to raise funds in order to grow and develop their business.
General Overview of EIS
For a general overview of EIS, please read our article What is the Enterprise Investment Scheme (EIS)? or download our fact sheet on The Enterprise Investment Scheme. At DRG Chartered Accountants, we also encounter many questions relating to EIS - here is just six of the most commonly asked. Should you have any further queries, please do not hesitate to get in touch with the DRG team - we would be delighted to hear from you.
Can EIS relief continue if, the company I have originally invested in, is acquired by another company?
The EIS relief can continue if 100% of the shareholding is purchased by a new company on the basis:
- The new company has only issued subscriber shares prior to acquiring the subsidiary
- The total consideration for the shares in the subsidiary must be in the form of shares in the new company (parent company)
- The shares issued must be of a corresponding description (same class & carrying the same rights) as they were in the subsidiary
- The shares issued must be in the same proportion that they were in the subsidiary previously
- Either the subsidiary or parent company must apply to HMRC for clearance that the arrangements are solely for commercial reasons & have received confirmation from HMRC
The new shares are treated as being exactly the same as the old shares.
If there is a partial acquisition of a company in less than 3 years, if a portion of the shares are acquired in that acquisition, do we lose EIS relief for all of the holding?
The shares that are sold will have a clawback of EIS relief, due to disposing of the shares within less than 3 years. Any gain on the sale will also be subject to capital gains tax. The remaining shares will still qualify for EIS provided the company is still qualifying. If a company acquires over 50% of the shareholding then the issuing company would fail the independence test and therefore become non-qualifying for EIS. In this case you would lose EIS relief for the remaining shareholding as well.
If I have EIS income tax relief in excess of my tax liability will this generate a refund?
Unfortunately, you can only receive a refund of tax already paid to HMRC, for example through PAYE on your salary, deducted at source. If the EIS income tax relief is in excess of the tax due at the end of the tax year, along with tax deducted at source, then you will lose the tax relief. However, you are able to carry back the EIS investment a year, which may allow you to make use of the full income tax relief. This could be very beneficial if your tax liability was substantially higher in the previous year and is not sufficient for the current year.
Can we hold the shares in an ISA under EIS rules?
Unfortunately, you are not able to do this under EIS rules.
Can you pass EIS shares to your partner if you aren’t married?
If you gift shares to a spouse then there is no chargeable event (tax to pay). However the spouse will be subject to capital gains tax at the point of them disposing of the shares. Unfortunately, you have to be legally married for this to apply.
If we made a loss on our shares, and an exit happened in less than 3 years, do we lose the income tax relief and have to refund the income tax benefit we received?
This depends of the level of the loss. If no sales proceeds are received (for example if the company went into administration) then the loss on the disposal of the shares would be recorded and could be offset against future capital gains. However, the loss would not equal the purchase price of the shares. It would be the purchase price minus the income tax relief claimed through EIS in your self-assessment return at the point of investment. Alternatively, if you prefer, the loss could also be used as an income tax reducer. If sales proceeds are received but you are still making a loss due the sales proceeds being lower than the original amount invested, then the calculation will be slightly different. Some of the income tax relief will be withdrawn due to the shares being sold within less than 3 years. The sales proceeds will be multiplied by the rate of relief when the shares were issued (30%) and this will be deducted from the tax relief received. The remaining balance will show the level of tax relief not withdrawn and this will be deducted from the cost of investment, reducing the allowable loss. For example:-
Sales proceeds: £50,000
Cost: £80,000 (original tax relief of £24,000)
Less Income tax relief not withdrawn: (50,000 x 30% = 15,000, 24,000 – 15,000 = 9,000)
Total allowable loss: £21,000 (50,000 – (80,000 – 9,000))
If you would like to find out more about Enterprise Investment Schemes, please do get in touch with the team at DRG Chartered Accountants. We would be delighted to hear from you.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.