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Good News For Investors

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 applicable rate.
  • 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 company. 

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 £10m. 

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 must:

  • 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 the relief. 

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 relief. 

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. 

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