In 1994, the UK government set up the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) to help innovative but potentially high-risk companies source funding. It is a scheme that is increasing in popularity yearly, and it can make a significant difference to a company making them more attractive to prospective investors. Below is some more information about this which can help you decide whether this is the correct choice for your business to secure the funds you need to make it a resounding success.
What Is EIS?
The government set up the EIS scheme to make potentially risky investments in innovative businesses more attractive to potential investors by offering tax relief. A company can use the EIS scheme to raise capital for their business to a value of £5 million per year. There is a ceiling on the amount of money you can raise this way which is £12 million in the company’s lifetime. However, you must follow the rules regarding this scheme, and your business must receive investment from a venture capital scheme within seven years of the company’s first commercial sale.
There are other rules for companies that are knowledge-intensive and do a significant amount of research, and you can find more about that by clicking here. You must ensure that your companies follow the rules to enable your investors to receive the EIS tax relief concerning the shares they own in your company. If you do not adhere to these rules for at least three years after the investment is made, the tax relief will be withdrawn.
How Does The Investor Benefit?
When looking to invest in EIS, there is no minimum investment amount in a company during the tax year. When you invest up to £1 million in a single tax year, you can enjoy a tax relief of 30%, which can give you a reduction in tax of up to £300,00 in a year if you have sufficient income and tax liability to cover it. Any profits you make are free from the capital gains tax (CGT) if you hold the shares for at least three years and claim the income tax relief on the investment.
If the investor disposes of the shares at a loss, they can then choose to put the amount of the loss, less the tax relief given, and set it against their income for the year when they disposed of the shares. You can also defer payment of CGT when you invest the money gained from your investment in EIS shares of a company that qualifies for the scheme. You must have invested at least one year before the gain or up to three years after the gain was made. It does not matter if you are connected to the company, and unconnected investors can enjoy both income tax relief and CGT relief.
If your company can offer EIS tax relief to investors, it is an excellent way to help raise funds for your business and attract quality investors to your company.