ENTERPRISE INVESTMENT SCHEME (EIS)

Transcription

1 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 THE CHANCERY ADVANTAGE Expertise with a Personal Touch

2 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 Contents INTRODUCTION WHAT SHOULD INVESTORS LOOK FOR WHEN SELECTING AN EIS WAYS TO INVEST TAX BENEFITS AVAILABLE TO INVESTORS CLAIMING EIS RELIEF QUALIFYING EIS INVESTORS SEED EIS (SEIS) ABOUT CHANCERY Disclaimer 1. These products are only suitable for eligible counterparties and professional clients as defined by the FSA Conduct of Business Sourcebook Chapter 4: Specialist advice should be sought before undertaking any investment in shares of a trading company. 3. The tax legislation for the EIS is complex. The information contained in this document is based on our current understanding of the tax legislation regarding EIS. 4. Tax legislation relating to EIS can change in the future and is beyond our control. 5. Any illustrations should not be deemed as recommendations and specialist advice should be sought. 6. Investing in shares in unquoted trading companies can be very high risk. The risk warnings for a particular EIS should be reviewed in detail prior to investment. Warning The various types of company, fund or pooled investments referred to within this document are not regulated by the Financial Services Authority. Many are considered to be unregulated collective investment schemes and, as such, in accordance with Section 238 of the Financial Services and Markets Act 2000, products of this nature may not be marketed to the general public and may only be marketed to specific categories of investor set out in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 or as otherwise provided in accordance with Section 238. Enterprise Investment Schemes (EIS) are not subject to Section 238 and it s restrictions and may in principle be offered to the general public, however, you are recommended not to invest in any EIS without having first taken personal financial advice as to its suitability for you as an investment. Chancery (UK) LLP is authorised and regulated by the Financial Services Authority 02

3 Introduction The Enterprise Investment Scheme (EIS) is a longstanding, non-aggressive investment vehicle that provides valuable tax benefits to investors. Introduced in 1994, by the Government at the time, EIS aim to help small unquoted British trading companies raise capital. To achieve this, EIS investors who purchase newly issued shares in EIS companies, are provided with a range of tax reliefs. The EIS tax benefits provide investors with an immediate boost to their investment. They aim to encourage new investments into appropriate companies by compensating investors for the higher levels of risk associated with typical EIS investments. Since their introduction, EIS have helped fund a wide range of companies, ranging from innovative technology companies, to more traditional businesses. Indeed there have also been a number of more specialist EIS, such as film EIS, that have helped finance film productions. Importantly, the government continue to support the EIS and to improve the general EIS legislation. For example the Seed EIS (SEIS) was announced in 2011 and started in April It was introduced to encourage investments into start-ups - smaller companies than the existing EIS. By their nature, EIS are higher risk than traditional investments. However by choosing carefully and taking appropriate advice, they can end up being excellent investments, especially when their valuable tax benefits are taken into consideration. In this guide we provide a simple introduction to EIS and the important points investors should consider. As this guide is not a comprehensive guide to EIS, we have not covered all the rules. We would therefore recommend investors contact Chancery or their Professional Adviser before investing. 03

4 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 What Should Investors Look for when Selecting an EIS? As with any investments, the tax reliefs granted under the EIS rules are worthless if the underlying investment does not generate a return. Selecting the correct EIS is therefore of paramount importance. It is very important for investors to consider an EIS opportunity very carefully before investing in it. Analysing an investment carefully is very important to make sure the risks and potential returns are appropriate. There are various criteria that investors should consider when investing in an EIS. Outlined below are some of the key points for consideration. Key criteria to consider:- Risk and Returns - It is important to assess the level of risk and the potential returns of an EIS. This can vary widely between different EIS. Some structured products are designed to reduce risk as far as possible within the tax legislation, and often this is reflected in the returns. Others are designed to provide a stake in a small business with potential for real returns, albeit, with the increased risk of loss of capital. Some EIS offer equity in companies, and others loans to companies, which can be of a lower risk nature. Investing in a managed portfolio of EIS can create a diversified portfolio that both reduces risk and also averages out returns over a number of different EIS companies. Other EIS attempt to offer returns by investing into an asset backed business, which ultimately gives a base for the EIS shares price in normal trading conditions. Track Record of Promoter - If at all possible it is useful to assess the track record of the promoters and their ability to source and manage EIS of a good quality. Certain promoters have better track records than others. In many ways the promoter will assist the underlying company and will have evaluated its business plan before taking on the project. Their experience therefore has an important bearing on the investment opportunity. Level of Charges - The Performance of the Company will be the key driver with any EIS investment. Consideration should however also be given to the level of charges. These tend to be greater than those of other traditional equity investments as EIS offerings are generally much smaller in size, can be complex and there is often far greater work involved. What tax year will the Income Tax Relief fall in? - Even though an investment may be made in one tax year, it may be the case that not all the tax relief is granted at the time of investment. It is possible that only part of the overall investment will be fully placed by the end of the tax year the investment is made, thus affecting when tax relief is granted. This can be relevant for Income Tax Relief and Capital Gains Tax deferral. Understand the Business Concept - The key aspect to understand, as far as possible, is the business the EIS Company is conducting. It is important to believe in the business model before investing and to have faith in the team behind the EIS. A full understanding of the risks is also important. Exit Routes and Liquidity - Unlike traditional investments, there is not usually an active market where EIS investors can sell their shares. Investors therefore need to wait until the value of their shares is realised by the EIS company or the Promoter. Common exit routes for EIS include trade sales, voluntarily liquidation, share buyback and flotation. It is important to check that an appropriate exit strategy has been considered. EIS investments can be complex. It is always advisable that professional advice is sought before an investment decision is made. 04

5 Ways to Invest By their nature, EIS are generally higher risk than traditional investments. This does of course also mean that the potential returns can be excellent. It is important investors invest in the right EIS in the right way. There are a number of different ways to invest in an EIS. Outlined below are the main options available. Please note that details on the Seed EIS can be found on page 10. Single Company EIS The most common way to invest in an EIS is to invest in a single company EIS. As the name implies, the EIS investment is in just 1 company. By their nature, these are the highest risk EIS and they also offer the highest potential returns. As these EIS are often unlisted, there will usually be no immediate exit route for investors. There is of course nothing to stop investors investing in a number of different single company EIS, thereby creating their own diversified portfolio of EIS. EIS Funds An EIS Fund provides investors with the benefit of the full range of EIS Reliefs spread across a number of different EIS investments. This is clearly a lower risk strategy than investing in an individual EIS company. There are 2 types of funds available approved and unapproved. Approved and Unapproved Funds The main difference to the investor between approved and unapproved funds relates to when tax relief can be claimed. With an approved Fund, the EIS tax reliefs can be claimed when the investment into the fund is made. However, with an unapproved Fund, tax reliefs can be claimed on each date the Fund invests into an investee company, not when the investor makes their investment into the Fund. EIS Portfolio It is possible to invest in a discretionary portfolio of EIS. Under this type of arrangement, a professional manager will invest the investor s money into various EIS over an agreed timescale. The portfolio will be professionally managed on the investor s behalf. There are a number of packaged EIS portfolios available from various product providers. With an EIS portfolio, EIS relief is available when individual investments are made not when the investment in the portfolio is made. Overall, whether an investment is made into an individual EIS, a portfolio of EIS or an EIS fund, providing the investment is chosen carefully, there is an opportunity for investors to achieve the perfect combination of tax efficiency and positive investment returns. 05

6 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 Tax Benefits available to Investors There are 5 main tax benefits available to EIS investors: 1. Income Tax relief on the cost of the investment. 2. Capital Gains Tax exemption on the disposal of the investment. 3. Capital Gains Tax deferral. 4. Inheritance Tax relief. 5. Loss reliefs (although not strictly a tax benefit, loss relief can reduce the risk to investors). 1) Income Tax Relief Investors can use EIS Income Tax relief to reduce their liability to Income Tax in the year of investment. Relief is available at a rate of 30% of the amount invested in EIS shares. However, the amount of tax relief obtained cannot exceed the amount of the Income Tax liability for the tax year in question. The maximum investment that will qualify for income tax relief in a tax year is 1,000,000. This can be spread across any number of EIS. EXAMPLE Gross investment in qualifying shares 100,000 Less Income Tax relief (@ 30%) 30,000 Net cost of investment 70,000 Timing Importantly, it is not necessary to wait until the end of the tax year for an investor to obtain tax relief. Carry Back of Relief Although unused EIS relief cannot be carried forward in any circumstances, there is a carry back facility. This allows the full amount invested (up to a further 500,000 investment) in EIS to be carried back up to 1 year to claw back that year s Income Tax at a rate of 30%. Withdrawal of Relief If EIS relief is claimed and then subsequently found not to have been due, the relief will be clawed back. The investment must be held for a minimum of 3 years in order for the investor to keep the Income Tax relief. Interest Relief It is not possible to claim Income Tax relief on interest paid on a loan taken out to buy ElS shares, even if that interest would normally qualify. 2) Capital Gains Tax Exemption The Capital Gains Tax exemption means that investors do not have to pay Capital Gains Tax on the disposal of EIS shares that qualified for Income Tax Relief. This means that the EIS will effectively grow tax free. Generally, gains accruing to Investors, are not charged to Capital Gains Tax provided the disposal of the EIS shares takes place at least 3 years after the issue of the shares. 06 EXAMPLE Sale proceeds of shares after 3 years 200,000 Original investment in shares (100,000) Tax free gain 100,000

7 3) Capital Gains Tax Liability Deferral EIS can be used by investors to defer tax on capital gains they have made on any other assets. This is achieved by using EIS Capital Gains Tax deferral. There are no minimum or maximum investment limits for Capital Gains Tax deferral and there is also no minimum period that the shares need to be held for. This is because the deferred capital gain is brought back into charge whenever the EIS shares are disposed of. In order to qualify for Capital Gains deferral relief, the EIS investment must be made either: 1 year before the capital gain being deferred is made; or within 3 years of the date of the capital gain that is being deferred occuring. Importantly once the gain is revived, on the sale of the EIS, the gain is taxable at the prevailing Capital Gains Tax rate at the time, not the rate applicable to the original gain. The current rate for higher rate tax payers is 28%. Of course, there is nothing to stop investors deferring the revived gain again. For example, this could be achieved by investing in a new EIS when the previously deferred gain is realised. EXAMPLE Gross investment in qualifying shares 100,000 Less Income Tax relief (@ 30%) (30,000) Less Capital Gains Tax deferral (@ 28%) (28,000) Net cost of EIS investment 42,000 4) Inheritance Tax Relief Inheritance Tax relief is a valuable tax benefit that can help investors with their Estate Planning. Provided the investor has owned their shares in an EIS for at least 2 years, the EIS should qualify for 100% Business Property Relief. This means that there will be no Inheritance Tax payable on the value of the EIS Shares. 5) Loss Relief An investor with EIS shares, that create a loss on disposal, after taking into account Income Tax Relief, may benefit from Loss Relief. The loss can be offset against Income Tax or Capital Gains Tax. If the investment has no value on disposal, the effective net loss would be limited to 42% for a 40% tax payer and 35% for a 50% tax payer. EXAMPLE Investor Tax Rate 40% 50% EIS Return Nil Nil Cost of Shares (100,000) (100,000) Less Income Tax Relief (@30%) 30,000 30,000 Net Loss (70,000) (70,000) Income Tax Relief (@Tax Rate) 28,000 35,000 Overall Loss (Effective Net Loss) (42,000) (35,000) From 5 th April 2013 it is possible losses on shares where EIS reliefs have been obtained may be capped. This is part of wider legislation aiming to cap tax relief at 50,000 or 25% of income, whichever is the higher. This is subject to consultation and may not be relevant to EIS. 07

8 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 Claiming EIS Relief The Claims Procedure 1) The EIS company completes and submits a Form EIS 1 to HMRC. 2) Once the claim is accepted, a Form EIS 2 is issued to the EIS company. 3) The Form EIS 2 authorises the company to issue a Certificate to the investors confirming that they are entitled to tax relief. 4) The investor then completes a claim on the back of the Form EIS 3 and sends this to their own HMRC office who will effect the Income Tax relief. This can be done either by adjusting the investor s PAYE code, making a tax repayment or by agreeing to offset the relief against outstanding tax liabilities. 5) The EIS Company has 2 years to submit the Form and the investor has 5 years from 31 st January following the tax year in which the shares are issued to claim their EIS relief. The 4 Month Rule The Company cannot submit the Form EIS 1 until it has carried on a qualifying trade or qualifying activities for at least 4 months. Provisional Clearance It is possible for the EIS company to obtain provisional clearance from HMRC in advance of the EIS share issue. Where possible investors should try to invest in EIS that have obtained EIS Advance Assurance from HMRC. 08

9 Qualifying EIS Investors EIS relief only applies to individual investors. The individual investors need not be resident in the UK when the shares are issued but would need to be liable for UK Income Tax. Investors can subscribe for shares on their own behalf or through a nominee or the manager of an approved Fund. Income Tax Relief, and Capital Gains Tax Exemption; A Summary of Restrictions There are certain restrictions affecting EIS investors which apply throughout the investor s relevant period. For this purpose, the investor s relevant period covers 2 years before and 3 years after the EIS shares are issued. The main restriction is that an EIS investor must not be connected with the company. An investor may become connected with the company, if: the investor and the interest of their associates in the EIS company exceeds 30%; or the investor or any of their associates are employees of the Company; or the investor or any of their associates are Directors of the Company. An individual s associates include their spouse, a civil partner, children, grandchildren, parents, grandparents, business partners and companies that he controls. However, brothers, sisters, nephews, nieces, uncles and aunts are not defined for this purpose. Connected The 30% Interest Test An investor cannot obtain EIS Income Tax relief if together with their associates, they hold (or are entitled to acquire at a future date), more than a 30% interest in the EIS company. This means an entitlement to more than 30% of: the issued ordinary share capital; or the loan capital and issued share capital; or the voting rights; or the Company s assets on a winding up. If any of these interests exceed 30%, the individual is connected with the EIS company and relief may be denied. In particular, care is needed where the EIS investor makes any loans to the company. There are a number of provisions in the EIS legislation to prevent people circumventing this rule, e.g. by restrictions or arrangements on the Articles of a company giving them effective control. Connected Being a Paid Director An EIS investor who has not previously been connected with the Company or employed in the business can take an active role in its management through becoming a paid Director. In such cases, reasonable and necessary remuneration is permissible. In assessing what is reasonable, HMRC would take into account, the scale, success and profits of the Company, the remuneration of other Directors and the contribution of the individual through his expertise or contacts. Capital Gains Tax Liability Deferral, Loss Relief and Inheritance Tax Relief The above restrictions do not apply to Capital Gains Tax liability deferral, loss relief and Inheritance Tax relief. As such, even if Income Tax relief and the Capital Gains Tax exemption are not available, an EIS investor may still be eligible for some of the other tax benefits. 09

10 ENTERPRISE INVESTMENT SCHEME (EIS) A SIMPLE GUIDE FOR INVESTORS 2012/13 Seed Enterprise Investment Scheme (SEIS) From 6 th April 2012, the Government introduced a new type of EIS - the Seed Enterprise Investment Scheme (SEIS). The SEIS is designed to run alongside the current EIS and the rules are designed to generally mirror the EIS rules. The SEIS aims to encourage investment into new start-up companies, a sector that the traditional EIS does not help too much. In order to encourage investors, a number of valuable tax benefits are provided. 50% Income Tax relief is available to individuals who invest in a qualifying company, irrespective of their rate of tax. This means that even a 20% tax payer will receive 50% Income Tax relief, although it is important to note that it is not possible to obtain Tax relief greater than the Income Tax liability of the investor. There is a cumulative investment limit of 150,000 per company. The connection restriction for Directors does not apply to SEIS. Individuals are limited to investing up to 100,000 per annum. The same Capital Gains Tax Exemption, Inheritance Tax Relief and Loss Relief as outlined on page 6 and 7 of this guide are also available. For Gains arising on the disposal of other assets there is a Capital Gains Tax Exemption on the gains if they are reinvested in a SEIS for the first year of the SEIS (the 2012/13 tax year). These combined benefits should prove very attractive to investors. The combined tax relief of up to 78% in the first year will help negate the risks investors face by investing in a start-up company. EXAMPLE Gross Investment in qualifying shares 100,000 Less Income Tax relief (@50%) 50,000 Less CGT Gain (@28%) 28,000 Net Cost of investment 22,000 10

11 About Us The Chancery Advantage - An Integrated Financial Solution At Chancery, we put the interests of you and your business first. We are a leading Accountants and specialist Tax Advisers who combine expertise with a personal touch. What sets us apart from the competition is The Chancery Advantage. Combining our accountancy and audit services with the services from our taxation business, we offer a financial proposition that it is hard to find elsewhere a fully integrated financial solution. Over the years Chancery has gained a valuable reputation both with our clients and within the industry at large for our innovative solutions and our first class service. Importantly, we believe in solutions not problems. It is no coincidence that amongst our growing client base, we have many top professionals from the world of finance. It is comforting to know that people and businesses from around the globe that deal with money on a daily basis come to us to look after their own finances. The Way Forward For further details on EIS in general, or for details on the current EIS Chancery are promoting, investors should contact their Professional Adviser or the Chancery Tax team. As well as advising investors on the specific EIS opportunities available, investors without an accountant can also use the Tax Service from Chancery Accounts & Tax LLP. Investors, who use this service, will receive advice on how to use an EIS in their own specific situation. Details on the Tax Service are available on request. Please contact Chancery to find out more. Contact details can be found on the back page of this guide. 11

12 Contact Details Chancery (UK) LLP Head Office Chancery Pavilion Boycott Avenue Oldbrook Milton Keynes MK6 2TA Towcester Valhalla House 30 Ashby Road, Towcester Northamptonshire NN12 6PG London 25 Southampton Buildings London WC2A 1AL Telephone: +44 (0) (Milton Keynes) +44 (0) (Towcester) Fax: +44 (0) Web: Chancery (UK) LLP is authorised and regulated by the Financial Services Authority If you would like to obtain details on other Chancery guides, please telephone or Chancery at Creative and Print by Palladium Solutions Information correct at time of going to print January 2013 All rights reserved. Copyright Chancery (UK) LLP, VR0113