Two announcements by the Chancellor George Osborne have
cheered up investors in 2011.
Enterprise Investment Schemes: now even more attractive
The Enterprise Investment Scheme is a tax-efficient scheme
designed to promote investment in smaller, growing UK companies.
Investors in EIS qualifying companies can claim income tax, capital
gains tax and inheritance tax relief.
Earlier this year, the Chancellor announced that the amount
you can invest in Enterprise Investment Schemes will double, while
the tax relief you receive has increased by 50%. Here is a brief
summary of the tax advantages for investors:
- Income tax relief is available on the amount invested in EIS
shares. The maximum investment in a tax year is currently £500,000
but this will double to £1m from April 2012. Income tax relief of
up to 30% of the money invested is available.
- If EIS shares are held for at least three years, any gains on
disposals are exempt from capital gains tax.
- Gains made on the disposal of other assets can be deferred by
reinvesting those gains in EIS shares. Any amount of capital gain
can be deferred; it is not limited to the annual maximum of
£500,000. When the EIS shares are sold the gain crystallises, at
which point capital gains tax becomes payable at the then
- If EIS shares are held for at least two years full relief
should be available to reduce their value for inheritance tax
purposes to zero.
More good news is that the government is expanding the
qualifying criteria for EIS. At the moment, to qualify, an EIS
company can employ no more than 50 people and its gross assets must
not exceed £7m before the investment in its shares is made. If it
qualifies, an EIS company can receive up to £2m in tax efficient
investment in any rolling 12 month period. An investor cannot hold
more than 30% of the share capital of an EIS
From April 2012 the qualifying employee limit will rise to
250 employees, the gross asset threshold will go up to £15m before
investment and the maximum 12 month investment will increase to
Companies in certain sectors cannot qualify for EIS. These
sectors include forestry, farming and hotels.
For investors to enjoy the tax advantages of EIS, throughout
the relevant three-year qualifying period, the company
- be a trading company, carrying on a qualifying trade,
principally in the UK;
- not be a subsidiary of another company or otherwise be under
the control of another company;
- not be listed on a regulated market, like the Main Market of
the London Stock Exchange (importantly, this means AIM and PLUS
Quoted companies can qualify for EIS).
Entrepreneur's Relief: increased lifetime limit
Another welcome announcement in the Chancellor's 2011
budget was the increase in entrepreneurs' relief to a lifetime
limit of £10m per person.
In the context of this now quite generous relief, it is ever
more important for business owners and those commencing new
businesses to structure their equity interests so as to qualify for
At Boodle Hatfield, we are seeing the new limits having an
immediate impact, particularly in the context of key employee
equity incentives. There are a number of potential arrangements
available which can assist those employees with less than a real
economic interest of 5% to benefit from the
If you would like to know more about Enterprise Investment
Schemes or entrepreneurs' relief, please speak to a member of our
Corporate team or our Commercial Tax team.