tax efficient investment for Business
HMRC has revised its guidelines for businesses trying to entice investors to buy stock in their company. If the firm is properly constituted and qualifies under the Enterprise Investment Scheme (EIS) or the Seed EIS guidelines, the investors may be able to take advantage of a range of substantial tax incentives.
The company can raise up to £5 million every year under the EIS, with a lifetime limit of £12 million raised. This covers funds received from other venture capital programs as well. Within 7 years of its first commercial sale, the business must get venture capital funding.
The issuing firm’s size is critical since the corporation and any qualified subsidiaries must:
- not have gross assets worth more than £15 million before to the issuance of any shares, and not have gross assets worth more than £16 million immediately following.
- The shares issued have less than 250 full-time equivalent workers
The investment must satisfy the “risk to capital” requirement, which means:
- The funds must be used for the company’s growth and development.
- The investment must pose a risk to the capital of the investors.
‘Growth and development suggest that the investment will be used to increase the company’s revenue, client base, or personnel count.
There are various more complicated scheme requirements that must be fulfilled in order for investors to obtain and retain EIS tax reliefs on their shares. If the investors and the firm do not follow the guidelines for at least three years following the investment, tax breaks will be withheld or revoked.
Before the shares are issued, it is best to ask for Advance Assurance from HMRC that the firm is an ‘EIS qualified company.’
For more details see: Use the Enterprise Investment Scheme (EIS) to raise money for your company – GOV.UK (www.gov.uk)
Seed EIS (SEIS) is intended to stimulate investment in small start-up businesses and, like EIS, offers a range of tax advantages to people who purchase fresh shares in a firm. When the SEIS shares are issued, the firm must not have been in operation for more than two years.
Only the first £150,000 of the company’s share capital qualifies for Seed EIS relief. This can, however, be part of bigger share issuance, with successive share offerings eligible for EIS relief up to a £5 million yearly cap.
Tax reliefs, like EIS, will be withheld or revoked from investors if the requirements are not fulfilled for at least three years following the investment.
The firm must be an unquoted company engaged in, or planning to engage in, a qualifying transaction at the time the shares are issued.
Another significant need for Seed EIS qualification is that the firm and any of its subsidiaries must:
- When the shares are issued, you must not have more than £200,000 in gross assets.
- Not be a partner in a relationship.
- When the shares are issued, the company must have less than 25 full-time equivalent employees.
Before issuing shares under EIS, it is advisable to ask for Advance Assurance from HMRC that the firm is a qualified entity. More information may be found at:
Use the Seed Enterprise Investment Scheme to raise money for your company – GOV.UK (www.gov.uk)
Tax Breaks for EIS Company Investors
Investors who are not related to the firm can claim an income tax reduction of 30% on their qualified EIS investments up to £1 million every tax year (or up to £2 million if at least £1 million is invested in knowledge-intensive companies). Thus, a £10,000 investment would result in a £3,000 tax savings for the investor.
The connected individual’s tests are difficult. For example, directors cannot claim EIS tax relief if they are a paid director of the firm at the time the shares are issued provided the payment is a ‘permitted payment.’ However, under the ‘business angel’ rule, they may become a compensated director following their investment.
The income tax reduction is kept if the shares are held for at least three years, and any gain on disposal is excluded from capital gains tax.
Capital gains on any asset sale can also be deferred by reinvesting the gain in qualified EIS shares.
Tax Breaks for Investors in SEIS Companies
Investors who are not related to the firm can claim income tax relief of 50% of their investment in eligible SEIS companies, up to £150,000 per tax year. Thus, a £10,000 investment would result in a £5,000 tax savings for the investor.
The linked person criteria are difficult and comparable to the EIS regulations; nevertheless, SEIS tax relief is available to directors.
The income tax reduction is kept if the shares are held for at least three years, and any gain on disposal is excluded from capital gains tax.
SEIS investors will also benefit from the fact that 50% of their investment can be deducted from capital gains that year. Thus, a £10,000 investment would allow the investor to deduct £5,000 from capital gains in addition to the £5,000 decrease in the income tax burden that year.
