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Personal tax reliefs for investors in UK companies

The UK has some very generous personal tax incentives for investors in start up and early stage companies, which include being able to set off all or part of the amount invested against personal income tax and being able to take any profit on selling the shares tax free, or to delay paying the tax.

There are two main schemes which operate in very similar ways- they are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). In this article we will refer to both schemes as EIS.

In this article we will consider the rules which the company receiving the investment money must follow to ensure that the tax benefits to the investors are not lost.

 

Let us look at some of the points:

1.       Before raising the capital the company should ask its tax adviser to consider if it qualifies for EIS, and to apply to HMRC (the UK tax authority) for Advanced Assurance

With the Advanced Assurance the company should submit Form EIS1 to HMRC when the shares are issued and it will receive a form EIS2 which authorises the company to issue a certificate EIS3 to the investors. The investors need this to be able to claim the tax relief. This process has to be repeated for each new issue of shares.

The shares must not be issued before the company receives the funds in full and into its bank account. Failure to follow this will cause the investor to lose all the tax relief.

 

2.       The Termination Date

The company must continue to comply with all the rules of EIS, until either three years after the shares were issued, or three years after the company started to trade or undertake Research and development activities, whichever is the later of the two. New Termination Dates will apply for each share issue.

 

3.       Control of the company

The company must not be under the control of any other company at any time until the Termination Date has passed, and it is easy to fall into a trap here. For example, if the company issues Loan Notes which have conversion rights then it could easily find that it has broken this rule and again, the investors will lose the tax relief.

EIS shares must not have better rights than any other shares. It has happened that a company wished to issue shares as part of an employee incentive scheme, and the employee shares had inferior rights to the EIS shares. The consequence of this was that the EIS shares now had better rights than the Incentive scheme shares, and the holders of the EIS shares lost their tax relief.

Care should be taken if the company wishes to buy another company, particularly if the company being bought was formed before the EIS company as this may prevent further EIS investment under the three year rule.

 

4.       Directors and employees

Generally, EIS investors, and their associates cannot become Directors or employees of the company. The term “associates” even extends to grandchildren, so the grandchild of an EIS investor taking a holiday job in the company will result in the investor losing their tax relief.

 

To summarise, EIS is a generous and valuable incentive to UK taxpayers to invest in UK start up companies. It is important that the companies receiving the investment are aware that there are rules and how to avoid breaking them.

 

Note: This article is not advice, and does not cover every aspect of EIS or SEIS. No person should act, or fail to act, based on anything contained in this article or any other publication issued by EBS. Always take advice specific to your circumstances before making any investments.

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EBS Ltd, Innovation Centre, Gallows Hill, Warwick, CV34 6UW

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