Ian Wright dissolves the myth of the ‘high risk’ EIS investment strategy and outlines how there really are benefits to be gained...
The Enterprise Investment Scheme (EIS) is usually thought of as a very high risk entrepreneurial investment which men in shiny suits try to sell you with attractive promises of 20% tax relief and tax free capital gains. Whilst the immediate tax reliefs and future tax free capital gains seem appealing, quite a few EIS investments fail to deliver a return and are rather difficult to sell on, making them highly speculative and long term investments.
Is it All High Risk?
What is not widely known about EIS is that it can be used by normal companies to take advantage of a number of interesting points such as:
1.Making investment into the company more attractive through available tax reliefs; and
2.Adding the ability for investors to holdover capital gains created in the past three years or one year into the future.
When we talk about investors we immediately think about outside, thrifty entrepreneurs or tough venture capitalists but this is a common misconception in that the investor could be an existing shareholder or a member of their family.
When already connected to the company by holding office, having shares or being related to such a person, the immediate 20% tax relief is generally lost along with the Capital Gains Tax exemption on the shares. However, one relief that does remain is the Capital Gains Tax ‘holdover’ relief.
Investing in Your Own Company
One of the frustrations of being a tax adviser is having to tell people who have sold shares, private assets or even their own company shares, that there is pretty much nothing they can do to get rid of the capital gain other than invest in an EIS company and claim EIS reinvestment relief.
The thought of subscribing for shares in such risky businesses usually puts taxpayers off. The EIS shares may hold off paying 18% CGT only to later find you have lost all your capital!
If you were going to invest money into an EIS company to holdover a capital gain, then why not invest in your own company?
We are still in difficult times and the banks are not too keen to lend money. It may be the case that you are a small company and need to inject some much needed cash but the only way to do this is to sell your shares in British Gas which will create an unwanted tax charge. If your company can qualify as an EIS company then you could holdover the gain.
How Do I Do This?
The application to become an EIS company is rather easy in that you fill in form EIS1 providing various details about your company. Send it to the tax office, and if they agree that you can be an EIS company they then issue you with an EIS2 certificate. Once armed with this certificate you can then issue form EIS3 to the new subscribing shareholders.
Certain types of trade are excluded from becoming EIS companies and there are some rather complex tax rules. However, you can read up more on this at www.hmrc.gov.uk/eis/ and www.hmrc.gov.uk/eis/ or speak to your tax adviser.