New and Improved! Entrepreneurs’ Relief and Enterprise Investment Scheme (EIS)

New and Improved! Entrepreneurs’ Relief and Enterprise Investment Scheme (EIS)
The 2011 Budget saw enhancements to Entrepreneurs’ Relief (ER) and the Enterprise Investment Scheme (EIS), as part of the Government’s commitment to “Make the UK the best place in Europe to start, finance and grow a business” (2011 Budget Report). There were other initiatives in the Budget; this article concentrates on two reliefs which are fairly widely available and potentially very useful.

Entrepreneurs’ Relief

This is a relief from capital gains tax (CGT) on the sale of a business, or an interest in a business e.g.  shares. It replaced Business Asset Taper Relief (BATR) in 2008 and basically caps the CGT on eligible gains at a rate of 10% (without ER, CGT can run as high as 28%).

Initially, there was a cumulative lifetime limit on the amount of gains which could benefit from ER, at £1 million. But in April 2010, that limit increased to £2 million, then £5 million from June 2010 and now – after the 2011 Budget – to £10 million with effect from 6 April 2011. This upscaling has been warmly received by the business community – the tax relief is effectively worth 10 times what it was originally, and even ‘serial entrepreneurs’ will get real benefit out of it.

However, there are still some who think that ER is a poor substitute for its predecessor, particularly that in order to qualify for ER when selling a company one has to have been an employee (or an officer) of the company, and to have held at least 5% of the ordinary shares, for at least a year. These thresholds are real barriers to the relief, which BATR didn’t have. Perhaps this is why Mr. Osborne also decided to improve EIS, alongside ER.

Enterprise Investment Scheme

EIS was devised to encourage investment into smaller companies. There is Income Tax relief on the amount invested, and provided the investor holds on to the shares for a minimum of three years, any gain on the shares should be CGT-free. Conditions apply to the investment by the individual, the investment and also to the company. The 2011 Budget has broadly made the following changes, subject to EU approval as State Aid:

• From 6 April 2011, Income Tax relief on a qualifying subscription rises from 20% to 30%.

• From 6 April 2012, the maximum investment that can be made by any one person will double to £1 million. 

These changes will significantly increase the Income Tax benefits of EIS.

Eligible company size limits also increase under the 2011 Budget proposals.

With EIS, there is no requirement for the individual to be an employee/director of the company, nor to have a minimum shareholding (in fact there is a maximum of 30%). It may be an over-simplification to say that EIS is available where ER is not, but there will often be scope for one or the other, when considering investing in a company.

Practical Tip

There are a number of hurdles to ensuring that an investment will qualify for either ER or EIS; but there are real benefits as well; there are also opportunities when considering a sale potentially eligible for ER, (such as arranging shareholdings for maximum benefit), so proper advice and preparation can make a real difference. And do make sure to keep shareholdings at 5% or more, for ER purposes.

By Lee Sharpe