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Business angels

The Government’s growth plan includes helping SMEs to access the finance they need to grow and invest. Measures announced following the Budget earlier this year included an announcement of reforms to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). This article focuses on the EIS only, a scheme designed to encourage private individuals to invest directly in newly issued shares of smaller high risk unquoted trading companies. The tax breaks available are a key driver to encourage individuals to invest.

Investors can benefit from the following tax breaks:

• For shares issued on or after 6 April 2011 income tax relief at 30% (20% for shares issued prior to 6 April 2011), on investments up to £500,000 a year.
• Capital Gains Tax (CGT) exemption on any gains made on the disposal of EIS shares.
• Relief is allowable if a capital loss is incurred on disposal and allowable amounts can generally be used against income or gains.
• CGT deferral relief for gains that arise on the disposal of any assets against subscriptions for shares in any EIS company.

The investor and connection

There are a number of detailed rules that can deny or lead to the withdrawal of income tax relief or restriction of the CGT exemption. One key condition is the requirement to hold the shares for three years. Another key condition for the investor is the no connection condition. The presence of connection to the company does not deny the ability to use the CGT deferral relief.

The no connection rules apply throughout the period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of trade if later. An individual can be connected with the company in two broad ways:

• by virtue of the size of the shareholding in the company or
• by virtue of a working relationship between the individual and the company.

We can provide further guidance on this area if this is likely to be a concern for you.

Qualifying companies

Companies must also meet certain conditions for any of the reliefs to be available for the investor.

In summary these include:

• The company must be unquoted when the shares are issued.
• All the shares comprised in the issue must be issued to raise money for the purpose of a qualifying trade.
• The money raised by the share issue must be wholly employed within a specified period (generally two years from issue).
• The company or group must have fewer than 50 full time employees.
• The amount of capital raised in a 12 month period is limited to £2 million.
• The company must not be regarded as an ‘enterprise in difficulty’ under EC guidance.
• The company must have a permanent establishment in the UK.
• The gross assets of the company must not exceed £7 million before the most recent share issue and is capped at £8 million immediately afterwards.

Certain activities are classed as excluded trades. The main excluded activities include trades of the following types; dealing in land or shares and securities etc, financial, legal, accounting, leasing, property development, farming, market gardening, hotel and care home management and operation.

Future changes

Proposals are being considered to introduce further changes to the EIS scheme for shares issued on or after 6 April 2012. These are detailed below.

• The annual amount that an individual can invest through EIS is to increase to £1 million.
• The annual amount that can be invested in an individual company is to increase to £10 million.
• The thresholds for the size of the company which may benefit from EIS investment is to be increased from fewer than 50 employees to 250 employees and the gross assets threshold is to increase to £15 million.

As you can see the scheme has a number of detailed rules. If this is an area you would like further advice on, please let us know.

Introduction »