07/04/11

By Adrian Walton

Enterprise investment scheme

Under EIS individuals invest directly in your company, as it can offer significant income tax, inheritance tax and capital gains tax reliefs to passive investors and, in certain cases, to owner-manager shareholders in many trading businesses.

For individuals who are UK resident for tax purposes (or have a UK income tax liability) these tax benefits include:

income tax relief equal to 30% of amounts subscribed for eligible shares (for shares issued after 5 April 2011)

ability to dispose of shares after three years free from CGT (currently a 28% saving only available if EIS income tax relief is claimed)

ability to defer the CGT payable on other chargeable gains by investing the gain in an EIS qualifying company (representing a cash flow advantage plus the potential for actual tax savings).

Venture capital trusts

VCTs are fully listed companies which encourage investment in small and medium-sized unquoted trading companies. Individuals invest in VCTs whose managers, in turn, invest in a portfolio of securities, mainly represented by shares and loan stock in unquoted trading companies. There are significant income tax and capital gains tax benefits available to investors, but only if the VCT retains its qualifying status. To achieve this, a VCT must have at least 70% of its investments represented by shares or securities in 'qualifying holdings'.

Thus, VCT managers are continually looking to invest in suitable unquoted trading companies as part of their portfolio. In recent years, as a result of enhanced income tax benefits being available to investors, there have been significant funds available to VCT managers to invest. As each VCT can invest a maximum of £1m per year in each of its portfolio companies, usually through a mix of debt and equity, this is potentially a good source of venture capital for investee companies.

How to qualify for EIS and VCT investment
The company must be unquoted at the time of the investment (there are special rules about subsequent listing). AIM companies count as unquoted for EIS and VCT purposes.

The company's (or group's if applicable) gross asset value must not exceed £7m immediately before investment and £8m immediately after (these limits are being increased for shares issued after 5 April 2011).

The company, or a qualifying subsidiary, must be trading wholly or mainly in the UK. The Finance Bill No 2 2010 contained provisions whereby this condition will be replaced by one requiring that the issuing company only has to have a permanent establishment in the UK. The operative date for the new rules will relate to shares issued on or after 6 April 2011.

There is a limit of 50 full-time employees in qualifying companies (or a group if applicable) at the time of the relevant investment (this limit is being increased for shares issued after 5 April 2011).

A number of trades are specifically excluded from the scheme, such as property development, certain financial services, farming and hotels.

The company must not be under the control of another company and is restricted to how it holds shares in subsidiaries.
The aggregate amount of qualifying funds that can be raised by any one company under these schemes must not exceed £2m in any 12-month period (this limit is being increased for shares issued after 5 April 2011).

For our free guide explaining how companies can make themselves more attractive to outside investors, contact Adrian Walton, our EIS and VCT specialist.

Adrian Walton
020 7131 4180
adrian.walton@smith.williamson.co.uk