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EIS Investments, Crowdfunding and Tax Relief Information

Start-up companies and smaller enterprises, which may be high-risk, often find it difficult to raise finance.  In recognition of this and in an effort to encourage investment in these companies, the government has created the Enterprise Investment Scheme (“EIS”), which has been operating for several years and which has proven to be very successful.

The information presented here is intended only as an overview – further information on EIS can be found here.  The eligibility of an investment for EIS relief depends on your circumstances and those of the investee company.  If you have any questions about your eligibility you should consult your tax advisor.

Browse InvestingZone's list of EIS investments here.

WHAT TAX RELIEF IS AVAILABLE TO INVESTORS?

Relief against income tax

What’s on offer?
  • Investors can reclaim 30% of the cost of their investments against their income tax liability for the tax year in which the investments were made.
  • Downside Protection up to 45% - If investments are sold at a loss, EIS investors can obtain up to 45% loss relief on the amount invested and can choose whether to set their loss relief against other gains (made now or in the future), or against income tax owed for the current or previous tax year.
How much can be invested under the scheme?
  • Up to £1million each year.
Are there any restrictions?
  • The investor must hold the shares for at least 3 years, otherwise the relief is withdrawn.

Relief against capital gains tax

Are there any reliefs available when I make the investment?
  • If an investor is funding an investment by selling other assets, he/she may be able to defer any gains made in making the sale.
What happens on disposal of the shares?
  • If the shares have met the conditions for income tax relief above (and it has not been withdrawn) then any gain on disposal of the shares is exempt from any capital gains tax.

DO THE SHARES CONSTITUTE AN ELIGIBLE INVESTMENT?

Requirements of the shares being purchased
  • Must be fully paid in cash at the time of issue.
  • Must be full-risk ordinary shares with no rights to redemption and no preference in the event of a winding up.
  • May have limited preferential rights to a fixed, non-discretionary, non-cumulative dividend.
  • Must be no arrangements to protect the investor from the normal risks of investment and no arrangements for the shares to be sold in the future.
  • Must be no loan made in connection with the purchase of the shares.
Use of funds raised
  • Must all be spent on a qualifying activity within 2 years of the shares being issued (or within 2 years of the trade commencing if that is later).
  • Qualifying activity means either carrying on a qualifying trade, preparing to carry on a qualifying trade or carrying out R&D which will lead to or benefit a qualifying trade.
  • Company must have traded for at least 4 months before relief can be claimed.

IS THE COMPANY ELIGIBLE?

Qualifying trade
  • HMRC requires that the trade must be conducted on a commercial basis with a view to making a profit.
  • Certain activities are excluded (eg banking, property development, providing accountancy services).
Maximum amount which can be raised under the scheme
  • £5million per year from any of HMRC’s venture capital schemes in aggregate.
Conditions which the company must meet at the point of investment
  • Fewer than 250 employees.
  • Max gross assets of £15million before investment takes place and £16million after investment takes place.
  • Must not be in financial difficulty.
Conditions which the company must meet continuously from the date of investment
  • Must not be controlled by another company.
  • Must own >50% and be in control of any subsidiaries.
  • Must have a permanent establishment in the UK.

ARE YOU AN ELIGIBLE INVESTOR?

What constitutes an eligible investor?
  • Must not be connected to the company by financial interest (hold >30% of the share capital or voting rights) at any time from 2 years prior to investment to 3 years after investment.
  • Must not be employed by the company (does not apply to directors as long as their remuneration begins after investment).