In our last Tax Tuesday, we considered EIS reinvestment relief (linked here) whereby an investment in shares in a qualifying EIS company can be used to defer a capital gain so it only ultimately comes into charge on the sale of the EIS shares themselves.
This week we look at another very valuable tax relief which can apply on an EIS investment: income tax relief.
Income tax relief of 30% of the total qualifying investment is available subject to an investment limit of £1m (£2m in ‘knowledge intensive companies’ KICs) each tax year. (A KIC is a company which meets certain criteria in terms of its spend on R&D, the intellectual property it creates and the proportion of skilled workers on its payroll).
It is given as a deduction from the total tax liability of the investor for the tax year of subscription although it is possible to carry back relief to the previous year assuming the limits for that year have not already been exceeded.
The relief cannot generate a repayment i.e. it can only reduce the investor’s tax liability to zero.
Therefore, in order not to waste relief, investors should ensure their tax liability is sufficient to fully utilise the relief.
To be a qualifying investor, the individual must:
- subscribe in cash for the shares
- not be connected with the company for three years from subscription; broadly an investor is connected if they with their associates controlled 30% or more of the company’s share capital or voting rights, can control the company in some other way or have been an employee or director with certain exceptions
- must not already hold shares in the company unless they are certain risk capital shares e.g. EIS shares themselves or in some cases founder shares
The company or its qualifying subsidiary must:
- carry out qualifying trading activities; there are a list of exceptions including legal and accounting services and various property related activities, farming, leasing various others
- be independent so not controlled by another company
- have a UK permanent establishment
- not be in financial difficulty
- seek to grow and there must be true uncertainty as to whether the business will succeed
- be less than seven years old from its first commercial sale (10 years for KICs) when it receives its first EIS investment
There is an annual limit of £5m (£10m for KICs) for amounts a company can raise from EIS and other risk-capital schemes and a lifetime limit of £12m (£20m for KICs).
The company (or group including qualifying subsidiaries) raising funds must not have gross assets worth over £15m before the investment or £16m afterwards and must have under 250 employees (under 500 for KICs).
The shares must be newly issued ordinary shares, subscribed for in cash and fully paid up at the time of the issue.
The funds raised must be used for the purposes of growing and developing the company’s trade within two years of issue or the commencement of the trade if later.
To claim the relief the investor must receive a compliance certificate from the company and the claim is normally made in the self-assessment tax return. The claim must be made within five years from 31 January after the year the investment was made.
How can we help?
EIS income tax relief is a very valuable relief in the right circumstances. The rules are stringent and the qualifying circumstances very specific. Great care is therefore needed to ensure this relief is fully utilised and that one or more of the many conditions is not inadvertently breached. To discuss this in more detail, please contact your usual relationship principal or email firstname.lastname@example.org.
The author takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss occasioned to any person acting or refraining from acting as a result of this material or from making use of this material can be accepted by the author.