Successive governments have recognised that the spirit of entrepreneurialism, though deeply ingrained in the UK’s culture, is not really very well supported by the financial institutions. In an attempt to provide more ready access to investment capital for entrepreneurs, a variety of schemes have been created – such as the Loan Guarantee Scheme, which provides financial guarantees for loans made by lenders to smaller businesses.
One of the less well-known schemes is the Enterprise Investment Scheme (EIS), which allows an investor to subscribe for new shares in a qualifying company and to obtain Income Tax relief on the investment at 20 per cent. If the shares are held for three years after the investment is made, any subsequent gain on them is not subject to Capital Gains Tax (CGT). EIS shares can also be used to ‘roll over’ a prior gain – deferring the resulting CGT liability until the EIS shares are disposed of.
For a company to issue EIS shares, certain conditions must be met:
- the shares cannot be quoted on a recognised stock exchange and arrangements for a flotation cannot be in progress. Note that a flotation on the Alternative Investment Market does not count for this purpose;
- there are limitations on the trades that are allowed for EIS relief. In particular, land-based businesses, professional services and financial activities are excluded;
- the company must have fewer than 50 full-time employees;
- the gross asset value in the company’s balance sheet must be less than £7m before the issue of the EIS shares (£8m afterwards); and
- there is also a limitation of £2m in any twelve-month period on the total amount which can be raised using the EIS or similar schemes, such as Venture Capital Trust investments.
A number of limitations apply regarding who can invest in the EIS shares of a company – investments by ‘connected persons’ and some others do not qualify for EIS treatment.
The EIS can be both a useful investment vehicle for investors not afraid of the risk involved and a source of capital for the smaller company which may find more conventional finance difficult to obtain.