Investing In Companies - Tax Incentives - October 2014
|Author:||Mr Adrian Walton, Mark Eade, Ray Abercromby, Andy Peters, Luke West, Andrew Lockwood and Rebecca Combes|
|Profession:||Smith & Williamson|
Investing in smaller businesses can often be viewed as risky. But there can be significant tax incentives for investing in some companies, which help to mitigate economic risk.
For those companies looking for alternatives to bank funding, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are options well worth exploring. In relation to the EIS, tax relief is potentially available to owner-managers of businesses, as well as outside investors.
In this guide we examine the three main types of investment available, EIS and funding from VCTs, which can be an important source of financial support for smaller businesses. We also examine the Seed Enterprise Investment Scheme (SEIS). SEIS was introduced with effect from 6 April 2012 and is aimed at stimulating investment in new businesses.
Under the EIS and SEIS, individuals invest directly in unquoted trading companies, whereas under the VCT scheme they invest in a quoted vehicle whose managers invest funds in such companies ('investee' companies).
These three schemes have some characteristics in common but a number of important differences. The appendix provides a comparison between them.
The reliefs that investors are likely to be most interested in are:
Income tax relief on investment/dividends Capital gains tax (CGT) relief on sale of EIS/SEIS/VCT shares CGT exemption on other gains by re-investing in a SEIS company CGT deferral under EIS Inheritance tax (IHT) relief under EIS and SEIS. This guide is based on legislation and information available as at September 2014.
Investors must be individuals to qualify for income tax relief. In addition, they must be resident in the UK if they are to qualify for CGT deferral relief.
Trustees of certain trusts can get CGT deferral relief, but not income tax or CGT-free sales.
Broadly, the individual must not be connected (in a period beginning two years before the share issue and ending three years after the later of the issue of the shares or commencement of trade) with the company in which they invest, which means:
The investor and their associates must not own more than 30% of: the ordinary shares, or the voting rights, or the total issued share capital, or assets on a winding up. (Associates include business partners and relations i.e. spouse/civil partner, grandparents, parents, children and grandchildren - but not brothers or sisters - in addition to trustees of certain trusts). They must not be a paid director of the company except in limited circumstances. They must not receive value from the company e.g. repayment of certain loans, receipt of excessive dividends, assets transferred at an under/over value, repayment of share capital. They must not be an employee of the company or any of its 51% subsidiaries. The rules are complex and have not been covered here in detail. This guide provides an overview of the rules only and professional advice should be sought.
Not all the above conditions apply if only CGT deferral is being claimed.
To receive VCT income tax relief an investor needs to be aged 18 or over. Trustees cannot qualify for this relief. There are complex provisions that can deny income tax relief where the investment is financed by loans.
For shares issued on or after 6 April 2012, the value of the gross assets of the company (or group if appropriate) must not exceed £15m immediately before the investment takes place and £16m immediately thereafter. For shares issued before 6 April 2012, these limits were £7m and £8m respectively.
The company must not be, "in difficulty" to qualify for the scheme (under the EU guidelines on State Aid...
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