The Enterprise Investment Scheme (EIS) is the most recent manifestation of the use of the tax system to attempt to encourage equity investment in smaller trading companies. It can be of benefit to you either if you wish to minimize your tax liabilities or you wish to encourage additional equity investment into your company.

EIS investment relief is given to qualifying individuals investing in qualifying companies for a qualifying business activity. There are three key tax advantages for the investor:

·         Income tax relief is obtained at 20% on a maximum investment of £500,000. Investors may carry back the full amount subscribed for shares (subject to the EIS qualifying limit), so that income tax relief is obtained for the year prior to the investment.

·         Capital Gains Tax is not charged on any gain generated on the EIS shares when those shares are sold (after a minimum of three years).

·         Capital Gains Tax (CGT) on a disposal within the last three years is deferred until the EIS shares are sold. This may also result in CGT being paid at a lower rate in the future

This combination of tax-saving opportunities makes the relief an attractive option for the right investor, though the high-risk nature of EIS investments makes them unsuitable for many individuals.

An individual may invest directly shares in one specific company (minimum qualifying investment £500) or through an EIS fund.

Any investor with a UK tax liability qualifies for EIS relief regardless of whether he is UK-resident.

An investor who becomes a paid director may qualify for relief provided, broadly, that he is not ‘connected with’ the company or its trade prior to his first acquisition of eligible shares. This is to attract investment from ‘business angels’ who provide management skills in addition to new capital.

For an individual to qualify for relief, a number of requirements must be satisfied, some relating to the individual’s connection with the company and some to the subscription itself.

Relief is only available where an individual subscribes for shares in a qualifying company wholly in cash. The shares must be issued in order to raise money for a qualifying business (either a qualifying trade, research and development or oil exploration).

To qualify for relief under the scheme, minimum and maximum subscription requirements must be satisfied.

Venture Capital Trusts (VCTs) are ‘indirect’ investments, whereby the individual invests in the VCT, which in turn invests in a portfolio of shares in unquoted trading companies. A VCT is essentially a type of investment trust company. Providing it satisfies various requirements it is approved by HMRC. The VCT itself gains tax privileges (exemption from corporation tax on gains arising from disposal of its investments) but, more importantly here, individuals investing in a VCT gain several tax advantages. The main ones are:

·         income tax relief at 30 per cent for the cost (up to a maximum of £200,000) of subscription in new VCT ordinary shares, provided that they are held for a minimum of five years;

·         subject to conditions, dividends paid to the beneficial owner of ordinary shares are exempt from income tax, and

·         exemption from capital gains tax on the disposal of shares that attracted income tax relief when acquired.

Both EIS and VCT investments can give rise to substantial tax advantages and should be considered as one to the options available to minimize and defer tax liabilities. The EIS can also be used as an incentive to encourage new investment into your company.