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Investment Enterprise and Efficiency

By: J.A.J Aaronson - Updated: 10 Jun 2011 | comments*Discuss
 
Investment Enterprise Efficiency Scheme

For many companies securing sufficient funding is a major consideration. This is particularly the case for start-up organisations, but the availability of working capital can be a problem that continues throughout the life of a business. Some companies choose to become listed on the stock exchange, but this in itself is not a guarantee of investment.

In order to address this problem, and in an attempt to encourage tax-efficient private investment in British business, the government has devised the Enterprise Investment Scheme.

The Enterprise Investment Scheme, or EIS, is aimed at helping businesses that require more than £250,000 in funding. Furthermore, they are designed to help small companies, in particular those with as little as £250,000 in total assets. They are administered by the EIS Association, and pools money from so-called ‘business angels’ in order to purchase shares in companies. Companies benefiting from EIS investment are either privately owned or listed on AIM.

Tax Efficiency

EISs clearly offer great benefits to small companies in need of capital. However, they also present a particularly attractive option for some investors as a result of their considerable tax efficiency. An EIS represents not only an investment vehicle but a way in which individual investors can reduce (or in some circumstances completely eliminate) their liability for Income Tax and Capital Gains Tax (CGT).

The rules regarding relief available to these investors are complex, but can be broadly outlined. The key consideration for most individuals is income tax. In many cases, relief is available equal to up 20% of the amount invested in an EIS. This applies if the qualifying investment is held for at least three years, and if the individual in question has a share in the relevant company of no more than 30%.

There are also rules regarding the amount invested: the individual must have a minimum subscription of £500 per company and a maximum of £500,000 per year. EISs also allow investors to defer capital gains tax. Any CGT liability on gains realised from a different asset that has been disposed of within 36 months prior to the EIS investment, or within 12 months after that date, can be deferred indefinitely. Unlike the rules regarding Enterprise Investment Schemes and income tax, there is no maximum limit regarding the amount of CGT relief available.

Risk Mitigation

EIS investments obviously present a high-risk option as a result of the fact that individuals are generally investing in start-up companies. However, the tax rules do provide some protection for those whose investments fail. Any shares bought through an EIS that are later disposed of for a smaller sum than that for which they were bought (that is, the investor made a net loss), the loss suffered can be offset against either the individual’s capital gains or chargeable income for the tax year. This means that the total risk to a higher rate taxpayer is limited to 48%. For details on a similar scheme, you may wish to read the article entitled Negligible Value Claim Relief elsewhere on this site.

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