Earn up to 50% Investment tax relief*
Enterprise Investment Scheme – Investment tax relief
The Enterprise Investment Scheme aims to assist smaller, higher-risk businesses in raising capital by providing tax relief on new shares in those that qualify. It is a tax-efficient option for investors to invest in small businesses.
In any tax year, individuals can invest up to £1,000,000 and earn a 30% tax break. They must, however, commit to the scheme for a minimum of three years.
The ‘carry back’ facility, which allows investments to be applied to the previous tax year, makes it even more appealing.
Those “severe problems” in raising small amounts of capital are still a relevant characteristic of the corporate landscape more than 20 years later.
Tax reliefs available:
1. Income Tax Relief
There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.
EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.
People connected with the company are not eligible for Income Tax Relief on their shares.
2. Capital Gains Tax exemption (CGT)
Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to accrue their CGT exemption over a long period of time which can be a great attraction.
3. Loss relief
If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief is given, can be set against income of the year in which they were disposed or, on the income of the previous year instead of being set off against any capital gains.
4. Capital Gains Tax deferral relief
Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose – connection to the company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.
Carry Back
There is a ‘carry back’ facility that allows 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. Relief is then given against the 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.
For more information, please see the HMRC website.
Restrictions
Connection to the company
Should the investor be connected to the company, they are not eligible for Income Tax Relief. Connections are defined through financial interest or employment.
Connection by financial interest
An individual is connected with the company if they control the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the share issue. If during this time, the individual becomes connected, then the relief will be withdrawn. All relatives except brothers and sisters are included within these restrictions.
Connection by employment
Partners, directors and employees of the company are all connected with it and therefore not eligible, as are associates. Associates are business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue.
The only exceptions are Business Angels – where the connection is as a director who receives no remuneration from the company.
Claiming your tax relief
The investor can only claim relief once the company sends through an EIS3 form. Claims are made through the Self-Assessment tax return for the tax year in which the shares were issued.
Claims can be made up to five years after the investment after the first 31 January following the tax year in which the investment was made.
The tax relief that is reduced or withdrawn
Tax relief will be withdrawn if you become connected to the company or if the company loses its qualifying status.
The relief will be either reduced or withdrawn if the Shares are disposed of or if the investor receives “value” from the company such as a loan or an asset below market value.
Examples
Here are a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in each case and you’re in the 45% tax bracket.
Case 1:
Pure Medical does well and doubles its value and you hold the shares for three years
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
Share sales = £20,000
Your gain = £13,000 (£10,000 profit from the sale plus £3,000 income tax relief)
Case 2:
Pure Medicals value stays the same
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
Capital Gains Tax = £Zero
Your gain = £3,000 (from the income tax relief)
Case 3:
Pure Medical closes and your shares are worth nothing
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
At risk capital = £7,000
Loss relief on at risk capital @ 45% = £3,150
Your actual loss = £3,850 (£10,000 – [£3,000 + £3,150])
Please note:
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.
Please visit the HMRC website for further information on EIS tax relief.
Risk warning
Investing in start-ups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Pure Medical is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to invest via Pure Medical once you are registered as sufficiently sophisticated. Please click here to read the full Risk Warning.
Investment opportunities are not offered to the public and investors must be eligible Pure Medical members. Further restrictions and Pure Medical’s limitation of liability are set out in the Investor Terms and Conditions. Please seek independent advice as required as Pure Medical does not give investment or tax advice.
Seed Enterprise Investment Scheme – Investment tax relief
SEIS, which was implemented in April 2012, is a very generous derivative of the Enterprise Investment Scheme (EIS). Its goal is to promote seed investment in early-stage businesses.
Investors, including directors, can get a 50 percent initial tax break on investments up to £100,000, as well as a CGT exemption on any gains on SEIS shares.
The maximum amount that each company can raise is £150,000.
Of course, we always hope that our investments succeed, but if you pay 45 percent tax and make a £10,000 investment that fails utterly, you will only lose £2,750 thanks to tax relief. That is one of the reasons why the Seed Enterprise Investment Scheme (SEIS) is so appealing to both investors and businesses.
The Seed Enterprise Investment Scheme, or SEIS, is incredibly generous. Of course, we all hope our investments do well, but if you pay tax at 45% and make an investment of £10,000 that fails completely, you only lose £2,750 due to the tax relief.
That’s what makes the Seed Enterprise Investment Scheme (SEIS) so attractive to investors and why we encourage all entrepreneurs to seek advance assurance from HMRC that they are eligible for SEIS.
Who can claim?
- The individual investor can be a director of the company, but not an employee
- An individual’s stake in the company can be no more than 30%
- SEIS tax relief applies only to recently incorporated companies
- The company must have 25 or fewer employees and gross assets of up to £200,000
- For 2012-2013 only, a CGT exemption will be offered in respect of gains realised on the disposal of assets that are invested through SEIS in the same year.
Examples
As with our EIS tax relief examples, we’re going to keep the numbers straight-forward and assume you invest £10,000, pay income tax at 45% and capital gains tax at 28%.
Case 1:
Pure Medical does well and doubles in value
Investment = £10,000
Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)
Profit from sale = £10,000
Capital Gains Tax = £Zero (if you have held the shares for three years)
Tax free return = £15,000
Case 2:
After three years the Pure Medical’s value is the same
Investment = £10,000
Profit from sale = £Zero
Your gain = £5,000 reduction in your income tax bill
Case 3:
Pure Medical folds and the shares hold no value
Investment = £10,000
Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)
At risk capital = £5,000
Loss relief = £2,250 (45% of at risk capital)
Your actual loss = £2,750 (£10,000 – [£5,000 + £2,250])
Carry Back
Did you know that you can carry back your SEIS tax relief back to the previous tax year?
An investor may elect under ITA07/S257AB(5) to have part or all of an issue of shares treated as though acquired in the tax year preceding that in which the shares were actually acquired. This is subject to the maximum annual investment limit for that earlier year (£100,000). The SEIS rate for the earlier year is then applied to the shares treated as acquired in the earlier year and relief is given accordingly. As there is no SEIS rate for periods before 6 April 2012 an election under S257AB(5) will be effective only for shares acquired in 2013-14 and later tax years.
For further information please visit the HMRC website.
Example 1:
Suzanne invests £20,000 in the tax year 2012-13 (6 April 2012 to 5 April 2013) in SEIS qualifying shares.
The SEIS relief available is £10,000 (£20,000 at 50 percent). Her tax liability for the year before SEIS relief is £15,000 which she can reduce to £5,000 (£15,000 less £10,000) as a result of her investment.
Example 2:
Steve invests £20,000 in the tax year 2012-13 in SEIS qualifying shares. The relief available is £10,000 as for Example 1.
However, his tax liability for the year before SEIS relief is £7,500. Steve can reduce his tax bill to zero as a result of his SEIS investment, but loses the rest of the relief available of £2,500 (£10,000 less £7,500).
How to claim
When Pure Medical has been trading for four months or spent 70% of the total investment, we will submit form SEIS1 to HMRC (or, more specifically, the Small Companies Enterprise Centre otherwise known as the SCEC).
Once SEIS1 has been reviewed and the requirements met, the SCEC will issue a copy of form SEIS3 for every investor. These are sent to the company and they can be passed on to each investor for them to complete and submit as part of their tax return.
Please note:
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of Pure Medical and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.
Please visit the HMRC website for further information on SEIS tax relief.
Risk warning
Investing in start-ups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Pure Medical is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to invest via Pure Medical once you are registered as sufficiently sophisticated. Please click here to read the full Risk Warning.
Pitches for investment are not offered to the public and investments can only be made by members of pure-medical.co.uk on the basis of information provided in the pitch by Pure Medical. Further restrictions and Pure Medical’s limitation of liability are set out in the Investor Terms and Conditions.
Investment opportunities are not offered to the public and investors must be eligible Pure Medical members. Further restrictions and Pure Medical’s limitation of liability are set out in the Investor Terms and Conditions. Please seek independent advice as required as Pure Medical does not give investment or tax advice.
