We dispel the myth of the ‘high-risk’ EIS investment strategy and outline how there really are benefits to be gained…
People often perceive the Enterprise Investment Scheme (EIS) as a high-risk entrepreneurial investment, lured by attractive promises of 20% tax relief and tax-free capital gains. While 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?
Unknown to many, regular businesses can use EIS to benefit from a variety of intriguing features.
1. Leveraging available tax reliefs to increase the attractiveness of company investments.
2. Providing investors with the ability to retain capital gains made in the past three years or one year into the future.
When we talk about investors, we immediately think of outsiders, 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 remains: 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 in an EIS company to hold over 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 hold over the gain.
How do I do this?
The application to become an EIS company is rather easy in that you fill out 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 will issue you an EIS2 certificate. Once armed with this certificate, you can then issue Form EIS3 to the new subscribing shareholders.
The EIS company excludes certain types of trade and imposes complex tax rules. However, you can learn more about this at www.hmrc.gov.uk/eis or speak with your tax adviser.
Ian Wright
