A guide to Enterprise Investment Schemes

Transcription

1 A guide to Enterprise Investment Schemes

2 Important notice This guide has been designed to provide general information about Enterprise Investment Schemes (EISs) and is based on our understanding of the current legislation and HMRC practice. The information herein should not be regarded as investment or taxation advice. Tax rules are complicated and reliefs and legislation relating to them may change in the future. This guide does not cover all the tax rules. In many cases, certain personal circumstances may affect how a rule works for you. The availability of tax reliefs is subject to personal circumstances and the EIS companies retaining their qualifying status. You should only make an investment on the basis of the information provided in the relevant product literature and we always recommend that you take professional independent financial and taxation advice before making any decisions to invest. Investments in unquoted companies are high risk in nature and therefore may not be appropriate for everyone. Find out more about the key risks on page 7. This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities, or to enter into any investment service, and no reliance should be placed on it. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No ). Registered in England No. OC Registered Office: St Magnus House, 3 Lower Thames Street, London, EC3R 6HD Information correct as at 7 August 2017.

3 Introduction Enterprise Investment Schemes (EISs) were introduced in 1994 to encourage investment in high-risk trading small and medium-sized companies (SMEs). EISs support smaller companies that may find it harder to get traditional finance, such as from banks. SMEs count for more than 99% of all private sector businesses in the UK and employ around 15.7 million people 1. Since EISs were launched, they have supported more than 26,000 individual SMEs and raised some 15.9 billion of funds 2. Investing in an EIS could be a useful option if you are looking to complement any other long-term investments, such as pensions or ISAs, as they can offer the potential for growth. However, you should remember that EISs are high-risk investments. EISs can offer a number of tax benefits, including 30% income tax relief on investments of up to 1 million per tax year (subject to personal circumstances and a three-year holding period). You can find out more about the tax reliefs available on EIS investments on page 4. How does an EIS work? There are two ways to make an EIS investment; directly into an EIS-qualifying company or through a professionally managed portfolio (often referred to as a fund ) that invests in a number of qualifying companies on your behalf. When you invest in an EIS fund, the manager will pool your funds with other individuals subscriptions, creating a portfolio of small companies. You will own shares in each of the companies within the portfolio through a nominee, rather than owning shares in the fund. There are three main types of EIS available: Single company EIS This type of EIS is concentrated in just one company, which increases the risk profile as risk is not spread across a range of companies or sectors. This type of EIS allows you total control over how your money is invested. However, there may not be an opportunity to sell your shares until the underlying company is sold or the business has enough cash to buy back its own shares. Approved EIS fund This is a professionally managed service that invests your funds on your behalf in a number of EIS companies. HMRC will review the fund s prospectus and provide advance assurance of its EISqualifying status, which means income tax relief is given in the tax year the EIS fund closes. The fund manager must invest 90% of the pooled subscriptions within 12 months of closing its fundraising. Unapproved EIS fund This is a professionally managed service that invests your funds on your behalf in a number of EIS investments. In this type of EIS, tax relief is available from the date the EIS invests in each company, rather than the date you subscribed your funds. HMRC does not provide advance assurance although the EIS manager may seek advance assurance on each EIS investment before it is made. It is important to discuss the type of EIS that may be suitable for you with a professional adviser. 1 Business Population Estimates for the UK and Regions October 2016, Department for Business, Energy & Industrial Strategy. 2 EIS and SEIS Statistics April 2017, HMRC A Guide to Enterprise Investment Schemes 3

4 Why invest in an EIS? In addition to the attractive tax reliefs, EISs can be used to complement your other long-term investments, such as pensions and ISAs. EISs usually invest in early-stage (and therefore high-risk) businesses that offer the potential for significant growth. A number of fund managers also offer EIS products that focus on capital preservation by investing in companies that have predictable revenue streams or are backed by assets such as property. EIS investments offer the following attractive tax benefits: ff30% income tax relief on investments up to 1,000,000 in the current or prior tax year (subject to your income tax liability, personal circumstances and a three-year holding period). ffunlimited capital gains deferral for gains realised up to three years before, or one year after, the date you invest in an EIS company. fftax-free capital gains. ffinheritance tax relief (so long as EIS shares are held for at least two years and at death). ffloss relief, offset against income at your marginal tax rate or capital gains (net of any income tax relief you may have received). Please note that the example set out on this page is for illustrative purposes only and no forecast or projection is implied or should be inferred. The value of tax reliefs will depend on personal circumstances. Example Jack is a higher rate (40%) taxpayer. He decides to invest 100,000 in a portfolio of 10 early-stage, high-risk EIS companies. The diagram below compares his gross proceeds from these investments with and without EIS tax reliefs. Invest 100,000 in a portfolio of 10 early-stage companies ( 10,000 in each) 10,000 in 1 company (average return 5.0x) 50,000 Under EIS Gross proceeds 125,000 Less: cost - 100,000 Gross return 25,000 Capital Gains Tax (Tax-free capital gains through EIS) 0 Income tax 30% 30,000 Loss relief offset against 40% 11,200 Profit after tax 66,200 Total return 166,200 Equivalent uplift +66% 50,000 in 5 companies (average return 1.5x) 75,000 Gross proceeds: 125,000 Without EIS Gross proceeds 125,000 Less: cost - 100,000 Gross return 25,000 Capital Gains 20%* ( 25,000 x 20%) - 5,000 Profit after tax 20,000 Total return 120,000 Equivalent uplift +20% *CGT is payable on overall gains over the Annual Exempt Amount of 11,300. The illustration above assumes the allowance is utilised elsewhere and gains/losses are subject to CGT at 20%. For more information on CGT, please see HMRC s website. Under EIS, the profit after tax is 231% higher 40,000 in 4 companies (fail completely) 0 4 A Guide to Enterprise Investment Schemes

5 Which companies qualify for EIS investment? In the 2015/16 tax year, 3,285 SMEs raised a total of 1.6 billion under the EIS scheme 3. HMRC has set rules on the types of companies an EIS fund can invest in. The main conditions are: ffthe purpose of the investment must be to promote business growth and development following the Finance Bill 2015, management buy-outs and the acquisition of existing trades/ businesses no longer qualify. ffthe company must be unquoted i.e. not listed on the main stock exchange (companies whose shares are traded on the Alternative Investment Market or the NEX Exchange Growth Market are considered to be unquoted). ffyour investment needs to be into new shares so you can t simply buy existing shares. ffthe company must not control or be controlled by another company. ffthe company must have less than 250 full-time employees*. ffthe gross assets of the company must be 15 million or less at the time of investment and not more than 16 million immediately after. ffthe company must be less than seven years old*. ffeach company can only receive a total of 5 million of funding in any 12-month period from any source classed as aid. Aid includes EISs, Venture Capital Trusts, Seed Enterprise Investment Schemes and any other government incentive scheme. The total funds received from state aid over the company s lifetime cannot exceed 12 million*. In addition to the above, the companies must carry out what is known as a qualifying trade. Most trades qualify for EIS funding, but there are a number of exceptions including financial activities, land dealing, property development, forestry and farming and the management of hotels and nursing homes. From April 2016, energy generation companies were also excluded from EIS funding. Please note, this is a brief summary of the rules based on our understanding of current legislation and HMRC practice. * Knowledge-intensive companies must be less than 10 years old, have less than 500 full-time employees and the total amount of funding is limited to 20 million. Broadly, knowledge-intensive companies are defined as those that: ffhave spent 15% of their operating costs on research and development (R&D) or innovation in one of the three years before investment; or ffhave spent at least 10% of their operating costs on R&D or innovation in each of the three years before investment. Additionally, the company must meet one of two further conditions: ffthe company has created, or is intending to create, intellectual property; or f f at least 20% of the company s workforce that are engaged in R&D or innovation must have a relevant master s degree or higher qualification. 3 EIS and SEIS Statistics April 2017, HMRC A Guide to Enterprise Investment Schemes 5

6 How to claim EIS tax reliefs Once an investment has been made in an EIS company, you will be sent an EIS3 certificate. Claiming income tax relief Your EIS3 will typically be sent 6-9 months from the date your shares are issued. You ll receive one EIS3 certificate per EIS company and these are likely to arrive separately. Once you receive your EIS3 certificates, you should enter the amount invested on your tax return for the year you are entitled to claim the income tax relief. If you have already submitted your tax return, then the claim section of the EIS3 certificate should be completed and sent to your tax office. If your shares were issued in the current tax year and you pay tax under PAYE, you can apply to claim relief for that year now. Fill in the claim certificate on page 3 of the EIS3, then tear off and send that page to your HMRC office. Claiming CGT deferral relief If a chargeable gain accrues in the current tax year and the shares were issued either in the current tax year or in a previous year, fill in the EIS3 certificate and send it with your tax return to your HMRC office after the end of the tax year. If your chargeable gain accrued in a previous tax year, fill in the EIS3 certificate and send it to your HMRC office with your tax return if not already submitted. In both circumstances, you will need to enter the chargeable gain(s) details on the appropriate capital gains summary page. For further details on how to claim your tax relief, please contact HMRC directly on Remember that if you are sent a tax return after the end of the year, you will also have to enter details of the claim on that return. If you want to claim relief for a previous tax year for which you either did not receive a tax return, or you received a return and you have already sent it in, fill in the claim certificate on page 3 of the EIS3, then tear off and send that page to your HMRC office. If the claim is made in time it will be treated as amending the tax return. Please keep your EIS3 certificates safe as it can take time to source replacements from HMRC. 6 A Guide to Enterprise Investment Schemes

7 Key risks EISs are high-risk products. It s important to understand the risks before making any decision to invest. EISs may not be suitable for all investors. Please read any product literature issued at the time of an EIS launch for a full list of risk factors. If you are in any doubt about your tax position or the suitability of an investment in an EIS you should seek specialist advice. We have set out the key risks that you should be aware of below: ffcapital is at risk: EISs invest in small unquoted companies which are higher risk by nature than larger companies. The value of your EIS investment may go down as well as up and you may not receive back the full amount invested. In addition, there is no certainty as to the level of income. Your shares in these companies may be difficult to sell. fftax reliefs are not guaranteed: all tax reliefs are subject to change in the future and personal circumstances. The availability of the tax reliefs depends on an EIS company retaining its qualifying status, and if this is not met, it could result in the loss of your tax relief. If you need further guidance, please refer to HMRC s website. ffeiss are long-term investments: you should be prepared to hold EIS shares for a minimum of three years to qualify for the available tax reliefs. ffpast performance is not a reliable indicator of future results. About Downing At Downing, we design and manage investment products that help investors look after their financial wellbeing, while our investment partnerships support businesses in their ambitions. In uniting the two, we build lasting relationships that become the foundation of our investment community. Since 1986, over 35,000 investors have been a part of what we do, and we are proud to have raised more than 1.7 billion in supporting the growth of small UK businesses. We currently have some 245 million of EIS funds under management. If you have any questions, or would like to find out more about our EISs, please call us on or visit A Guide to Enterprise Investment Schemes 7

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