The

Enterpris
e
Investme
nt
Scheme
Benefits to
Investors

AMOO Venture Capital

Advisory
 Table of Contents

Topic Page
1. The Nature of the Investment 1
1.1. Direct Investment
1
1.2. Investment Through a Fund 1
2. Tax Relief Under the Enterprise Investment Scheme
2
2.1. Income Tax Relief 2
2.2. Capital Gains Tax Deferral
3
2.3. Capital Gains Tax Exemption 3
2.4. Loss Relief 3
2.5. Exemption of Inheritance Tax 3
3. Eligibility of Investors 4
3.1. Financial Connection 4
3.2. Employment
4
Abstract

The Enterprise Investment Scheme is a potentially attractive

program created by Her Majesty’s Revenue and Customs Service of
the United Kingdom (the HMRC) to help smaller companies raise
finance. The Enterprise Investment Scheme encourages investors to
support smaller higher-risk companies by offering a variety of tax
advantages to investors that purchase new shares in these
companies.

1. The Nature of Investment

Investments can be made directly into companies that qualify
under the Enterprise Investment Scheme, or through an
Enterprise Investment Scheme Fund. Investors who are not
connected to with the investee companies (please see “Eligibility
of Investors” below) are eligible to receive tax advantages
through the Enterprise Investment Scheme.

1.1. Direct Investment

Investors can benefit from the tax advantages of the

Enterprise Investment Scheme through direct investment into
qualifying companies. The shares that are invested in must
be paid up in full and in cash upon issuance. To benefit from
the advantages of the Enterprise Investment Scheme,
Investors should subscribe to “full-risk” ordinary shares with
no preferential rights to dividends or to the company’s assets
in the event of a wind-up. To benefit from the scheme, there
must also be no arrangements to protect the investors from
the normal risks associated in with investing in shares, and
no arrangements for the shares to be repurchased by anyone
else after the end of the period.

1.2. Investment through a Fund

Investors can also benefit from the tax advantages of the

Enterprise Investment Scheme through investment into an
EIS Fund, which will invest on the behalf of an investor in a
number of qualifying companies. The investor is still the
owner of the shares, and the method for claiming tax relief is
the same as the method of claiming tax relief for direct
investments.

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2. Tax Relief under the Enterprise Investment Scheme
Individual who subscribe for shares in an Enterprise Investment
Scheme qualifying company are eligible to receive tax
advantages. The Enterprise Investment Scheme offers four
distinct tax relief opportunities:

2.1. Income tax relief: By reducing the amount of their

liabilities to income tax, investors can benefit from an income
tax relief of 20% rate of income tax, on a maximum of
£500,000 for any one-tax year.

Income tax relief is available to individuals only, who invest in

shares in an Enterprise Investment Scheme qualifying
company. The minimum threshold of investment required is
£500 worth of shares in any one company in any one tax
year. The income tax relief is 20 per cent of the cost of the
shares, and is set-off against the individual investor’s income
tax liability for the tax year in which the investment was
made.

Income tax relief of a maximum of twenty percent can be

claimed on a maximum of £500,000 invested in such shares.
Thus the maximum tax reduction that can be realized in any
one year is £100,000 providing that the investor has
sufficient income tax liability to cover it.

An important note is that this relief cannot be set off against

dividend income, as the tax credit attached to the dividend is
not recoverable. It can, however, be set off against any
higher rate tax payable on dividends.

Also, There is a ‘carry back’ facility which allows the all or

part of the cost of shares acquired in one tax year, to be
treated as though those shares had been acquired in the
preceding tax year. This “carry back” facility allows relief to

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 be given against the income tax liability of the previous year
up to the maximum.

Income tax relief is then set off against the investor’s income
tax liability of that preceding year rather than against the tax
year in which those shares were acquired. This is subject to
the overriding limit for relief for each year.

The shares must be held for a certain period or income tax

relief will be withdrawn. Generally, this is three years from
the date the shares were issued. But if the qualifying trade
started after the shares were issued, the period is three years
from the date the trade actually started.

NB Income tax relief can only be claimed by individuals who are not
'connected' (Please See “Eligibility of Investors” below) with the
company.

2.2. Capital Gains Tax Deferral: The payment of tax on a

capital gain can be deferred where the gain is invested in
shares of an EIS qualifying company. The capital gain made
through sales of other assets can be reinvested into an
Enterprise Investment Scheme company. The assessment of
that chargeable gain can be deferred on gains made from
other non-Enterprise Investment Scheme assets if made less
than 1 year before the investment or 3 years after. The gain
may result from the sale of any kind of asset, but the
investment is required to be completed within a period of one
year before, or three years after the gain arose.

There are no minimum or maximum amounts for deferral.

And it does not matter whether the investor is connected with
the company or not. Unconnected investors may claim both
income tax and capital gains deferral relief.

There is no minimum period for which the shares must be

held; the deferred capital gain is brought back into charge
whenever the shares are disposed of, or are deemed to have
been disposed of under the EIS legislation.

2.3. Capital Gains Tax Exemption: If an investor that has

invested under the Enterprise Investment Scheme has
received income tax relief, and the shares are disposed of
after a period of 3 (three) years (as specified in 2.A.); then
any gain on the shares is exempted from Capital Gains Tax.

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 2.4. Loss Relief: The loss relief reduces the investor’s exposure.
Shares disposed at a loss can be set against the investor’s
capital gains or income in the year of disposal or the previous
one.
2.4.1. Loss Relief Offset Against Income: For losses offset
against income, a 40% tax payer will see his or her
investment exposure limited to 48p/£1 whereas a 50% tax
payer will be limited to 40p/£1.
2.4.2. Loss Relief Offset Against Capital Gains: Shares
disposed at a loss can be set against the investor’s capital
gains. In this case, rates of 18% and 28% are applied
against the capital gains.

2.5. Exemption of Inheritance Tax: Inheritance tax is not

applied on the investment if the investment has been held for
over 2 years. Any liability for Inheritance Tax is reduced or
eliminated in respect of such shares.

The Enterprise Investment Scheme provides attractive benefits for

investment opportunities in small enterprises. Potential total tax
savings and deferrals of up to 60% of Income Tax and Capital Gains
Tax, and the chance to support new ventures are two major benefits
of the Enterprise Investment Scheme. The EIS3 form allows
investors to claim any EIS tax relief.

3. Eligibility of Investors

To be eligible to invest in an Enterprise Investment Scheme

qualifying company, an individual investor must not be connected
with the company that he or she is investing in. An investor can be
connected to a company in two different ways:

3.1. Financial Connection

If an individual holds more than 30 percent of the share

capital, or voting rights, of a company, then that individual is
deemed to be connected to the company financially.
Additionally, if an individual holds an entitlement to more
than 30 percent of the assets in the event of liquidation of the

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 company, then the individual is also deemed to be connected
to the company.

The shareholdings, voting rights, and rights to assets in a

company that are held by business partners, trustees of any
settlement where the individual (investor) is a settler or
beneficiary, and spouses are deemed as the individual’s
associates. These holdings are also taken into account when
establishing the eligibility of investors and their financial
connections with Enterprise Investment Scheme qualifying
companies.

These conditions of eligibility apply from a period of time starting

two years before the issue of shares of the company, and ending
three years after the share issue.

3.2. Employment

If an individual is a partner, director, or an employee of the

company that he or she is intending to invest in, then that
individual is deemed as connected to the company and is not
eligible for relief. An individual is also not eligible for relief if
an his or her associates are such partners, directors, or
employees of a company that is to be invested in under the
Enterprise Investment Scheme.

As with the terms and conditions associated with connection

because of a financial interest in the company, the
restrictions of eligibility apply from a period of time starting
two years before the issue of shares of the company, and
ending three years after the share issue.

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