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Tax advantaged equity schemes – key requirements

Against the backdrop of post referendum, pre Brexit uncertainty, stimulating investment in small/medium sized private companies and entrepreneurial start up businesses will continue to be a significant factor for economic growth. In recent years, recognising that unquoted trading companies often face real difficulties in attracting investment, the Government has introduced various schemes designed to help such smaller, higher risk companies raise equity finance.

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) allow investments to be made in such businesses in a tax efficient way. Generous tax breaks attract investors; provided both the company and the individual investor satisfy certain conditions, income tax and capital gains tax relief is available for individuals who subscribe for shares in qualifying companies. For investors, structuring any investment to take advantage of entrepreneurs’ relief (ER) will reduce their capital gains tax (CGT) from 20% to 10% and is available for up to £10 million of lifetime gains. In addition, the recently announced investors’ relief (IR) means that a similar CGT saving will now be available to shareholder investors as, unlike ER, there is no requirement that investors work in or manage the company.

There are various rules which apply to determine whether or not the company issuing shares is a qualifying company under EIS or SEIS. Similarly there are a number of specific conditions which an investor must satisfy to comply with the requirements of the respective schemes and in order to be eligible for the tax reliefs. EIS and SEIS are subject to EU rules on State Aid; with impending Brexit, the UK Government may be inclined to relax these restrictions.

Set out below is a brief comparison of the key requirements of tax advantaged equity schemes.

Comparison of Tax Advantaged Equity Schemes

  SEIS EIS ER IR
Maximum investment in tax year £50,000 £1,000,000 No limit No limit
Income tax relief 50% 30% X X
CGT reinvestment relief Up to half invested Up to amount invested X X
CGT rate on disposal 0% 0% 10%1 10%1
IT/CGT loss relief X X
Ownership ≤30% ≤30% ≥5% No limit
Directorship permitted 2 3 4 X
Minimum holding period 3 years 3 years 12 months 3 years

1 On first £10m of lifetime gain
2 Cannot be an employee within 3 years of subscription
3 ’Business Angel’ not previously employed or connected to the company
4 Must be director or employee

For more information on tax advantaged equity schemes or other tax queries, please contact Niall Murphy in our Corporate team.