Enterprise Investment Scheme. Tax efficiency for investors

Transcription

1 Enterprise Investment Scheme Tax efficiency fr investrs

2 Intrductin Welcme t Keyntes. Keyntes is a mnthly event and publicatin t help early stage businesses get t grips with key legal issues. A bit abut us Keyntes is brught t yu by Keystne Law, a leading Lndn law firm which acts fr a range f clients, frm well-established cmpanies t prmising start-ups. We have created Keyntes t help yur business grw and t shw yu hw we think. We d nt claim t have reinvented the law firm, but we d think we have built a law firm t give ur clients just what they need. Keystne uses technlgy and mdern wrking practices t remve the need fr junir lawyers and back ffice staff. Our lawyers wrk directly with yu, ur clients, and with their clleagues t deliver results. They have supprt when they need it, but they are nt chained int standard prcesses and there is n big crprate machine in the backgrund; the result is a slutin that is built uniquely arund yu and feels very persnal. Even thugh we are a big firm, we chse nt t act like ne. We chse nt t have large ffices, teams f secretaries and an army f junir lawyers. This makes us respnsive t yur needs and allws us t charge very cmpetitive rates, while still attracting the best lawyers in the business. This way f wrking is als very efficient; having an experienced legal expert frm start t finish means yu get right t the key issues first. N time is spent n internal team meetings r drafting by cmmittee yu get slutins nt prblems and, mst imprtantly, yu wrk with the same lawyer fr the life f the matter. Our clients chse Keystne because they want: cmmercial and practical help, nt just legal advice t pay fr advice, nt verheads access t a wide range f genuine experts ne law firm fr all their needs, frm start-up t exit a persnal service frm a senir lawyer a law firm that sticks t qutes If this is what yu are lking fr in a law firm, then please us at keyntes@keystnelaw.c.uk. We wuld like t help slve any legal prblem yu are facing. Disclaimer We have written these materials t help yu, but n article can address all the issues. The benefit f using an experienced lawyer is that they ask the right questins and build the slutin arund yu. Please therefre nte that these materials nly prvide yu with general infrmatin and shuld nt be regarded as a substitute fr taking legal advice. 1

3 ENTERPRISE INVESTMENT SCHEME Tax benefits f the Enterprise Investment Scheme (EIS) Eligible individuals (e.g. business angels wh satisfy relevant cnditins) investing in new shares issued by a qualifying cmpany can secure the fllwing tax benefits: capital gains tax (CGT) deferral relief tax realised n the dispsal f anther asset can be deferred by reinvesting the gain realised n that dispsal in EIS eligible shares; incme tax relief incme tax relief can be secured in respect f the amunt invested in EIS eligible shares, subject t an annual limit n the amunt invested f 500,000 relief is given at the rate f 30% fr shares issued n r after 6 April 2011 (an increase frm the previus 20% rate annunced in the 23 March 2011 Budget and indeed there is sme speculatin in the press f a further increase t 50% relief may be intrduced in respect f the first 100,000 invested). The 23 March 2011 Budget als annunced that the 500,000 limit will be increased t 1m frm 6 April 2012; CGT exemptin an exemptin frm CGT in respect f any capital gain realised n the dispsal f the EIS eligible shares. Further infrmatin n the abve reliefs and a summary f the main cnditins t be satisfied in rder t secure the reliefs is prvided belw. Reference is als made t further incme tax relief which can ften be secured in cases where the investr suffers a lss. CGT Deferral Relief Deferral f tax arising n the dispsal f any ther asset is available if the EIS investment is made in the perid beginning ne year befre and ending three years after the date the gain arse. There is n limit n the amunt f the gain t be reinvested in the EIS shares which can attract the deferral relief. The cnditins t be satisfied (relating t the cmpany in which the reinvestment is made, the shares acquired and the applicatin f the mney reinvested) are set ut in the Appendix t this Briefing. In additin the investr must be UK tax resident. The tax deferred by making the reinvestment becmes payable in prescribed circumstances, which include the fllwing: the investr dispses f the EIS shares (the subject f the reinvestment); the investr becmes nn-uk resident within three years f the investment; and the EIS shares cease t be eligible shares (see the Appendix) during the perid f three years after their issue. 2

4 Deferment is nt always advantageus. There can be circumstances in which the tax payable fllwing the perid f deferment will be greater than that which wuld have been payable n the riginal dispsal, if n deferment had been sught. Incme Tax Relief 20% incme tax relief (30% frm 6 April 2011) is available n amunts invested in EIS eligible shares, subject t a minimum annual amunt invested f 500 and a maximum amunt f 500,000 ( 1m frm 6 April 2012). An electin can be made t treat the shares as having been issued in the previus tax year, s that incme tax relief can be claimed in that previus year (e.g. where the 500,000/ 1m limitatin was nt utilised in the previus year). It is necessary t btain an EIS certificate frm the investee cmpany and HMRC must authrise the cmpany t issue this. The cnditins t be satisfied (relating t the cmpany in which the investment is made, the shares acquired and the applicatin f the mney reinvested) are set ut in the Appendix t this Briefing. It is pssible t btain a prvisinal clearance frm HMRC, in advance f an investment being made, that the relevant cnditins will be satisfied. In additin the individual making the investment must nt be cnnected with the cmpany fr a perid frm tw years befre the issue f the shares (r the date f incrpratin, if later) and ending three years after the issue f the shares, r after the trade cmmences, if later. The individual will be treated as cnnected with the cmpany, and s nt eligible fr incme tax relief, if he/she: has, r is entitled t acquire, mre than 30% f the issued rdinary share capital and lan capital r f the vting pwer f the EIS cmpany r any f its subsidiaries; r is emplyed by, r is a directr f, the cmpany r any f its subsidiaries (r a partner f the cmpany r any f its subsidiaries); r is a partner f the cmpany f a subsidiary. The individual can qualify fr relief, even thugh he/she is cnnected with the cmpany slely by reasn f being a directr, if, when the shares are issued, he has never befre been cnnected with the cmpany r invlved in carrying n its trade. In such circumstances it is als pssible fr the directr t receive reasnable remuneratin fr his duties as a directr and the individual will nt be disqualified if he als becmes an emplyee. This relaxatin f the cnnected persns rule is aimed at business angels wh are t make their expertise available t the cmpany. Relief will be withdrawn if the shares are dispsed f within the perid ending three years after the issue f the shares, r after the trade cmmences, if later. Relief will als be withdrawn t the extent that the investr receives value frm the cmpany in the perid starting twelve mnths befre the date f acquisitin and ending three years after that date, r after the trade cmmences, if later). 3

5 CGT Exemptin An exemptin frm CGT n a dispsal f the EIS shares made mre than three years after their acquisitin, r after the trade cmmences, if later. This exemptin is nly available fr shares which have qualified fr incme tax relief. If incme tax relief is nt given n the full amunt invested (e.g. because the amunt exceeds the permitted maximum) the CGT exemptin will be restricted t a prprtin f the gain. The Investr s Net Expsure - Relief fr Lsses If an investr suffers a lss n his investment greater than the amunt n which incme tax relief was btained, further incme tax relief can ften be btained at the individual s marginal rate. This means that an individual wh pays incme tax at the tp rate f 50% will ften suffer a maximum verall effective lss f 35p in the pund, as illustrated belw. Example: Investment f 100,000 in XYZ C. EIS incme tax relief fr the investr f 30,000. Three years later XYZ C. ges int inslvent liquidatin - n return t sharehlders. Investr can claim relief against his incme fr a lss f 100,000 less the 30,000 n which EIS incme tax relief was claimed, i.e. relief n 70,000, resulting in a tax benefit f 35,000 fr a taxpayer wh can utilise the full amunt f the relief at 50%. Ttal lss n an investment f 100,000 after tax relief: 35,000. The extent t which this additinal relief will be available (if at all) will be dependent n the facts f each case. Further Advice This Briefing summarises sme f the main features f EIS rules, based n the law in frce n 6 April It includes references t changes annunced in the 23 March 2011 Budget, all f which are subject t State Aid apprval. The relevant legislatin is lengthy and detailed, and includes specific anti-avidance rules nt tuched n in this Briefing. Specific advice shuld be sught in relatin t the facts f any particular case. Tm Daltry has mre than 28 years f experience as a tax lawyer and was Head f Tax at Eversheds befre becming a Cnsultant Lawyer. He has acted fr a brad range f clients, ranging frm entrepreneurs and management teams t private equity huses, large PLCs/multi-natinals and financial institutins. E: tm.daltry@keystnelaw.c.uk T:

6 The Appendix The main cnditins t be satisfied, which are cmmn t all three frms f relief (CGT deferral, incme tax and CGT exemptin), are as fllws (defined terms being mentined in italics): the shares must be Eligible Shares the shares must be issued by a Qualifying Cmpany the shares must be acquired by subscriptin (i.e. new shares issued by the cmpany and nt a transfer f existing shares) the subscriptin must be whlly in cash the shares must be fully paid at the time f issue the shares must be issued t raise mney fr the purpse f a Qualifying Business Activity f the cmpany f ne f its 90% subsidiaries the mney raised by the issue must be emplyed whlly fr the Qualifying Business Activity within tw years f the issue f the shares r, if later, within tw years f cmmencement f the Qualifying Business Activity relief is nt available if the ttal f the tax advantaged Venture Capital Investments made in the cmpany in the year ending with the date n which the EIS shares are t be issued exceed 2m (expected t be increased t 10m frm 6 April 2012, as annunced in the 23 March 2011 Budget) Defined Terms: Eligible Shares: New rdinary shares which carry n present r future preferential right t dividends r t the cmpany s assets n its winding up and n present r future right t redemptin. Qualifying Cmpany: An unquted cmpany (AIM cmpanies are treated as unquted) which exists whlly fr the purpse f carrying n ne r mre Qualifying Trades, r a parent f a trading grup where the business f the grup as a whle des nt cnsist t any substantial extent f anything ther than activities which fall within the definitin f Qualifying Trade; and the balance sheet value f the cmpany s/grup s grss assets must nt exceed 7m immediately befre the issue f the EIS shares and must nt exceed 8m immediately afterwards; the 23 March 2011 Budget indicates that these limits will be replaced, with effect frm 6 April 2012, by the mre generus requirement that the grss assets must nt exceed 15m immediately befre the issue f the EIS shares; and the cmpany/grup must nt have 50 r mre full-time f full-time equivalent emplyees; the 23 March 2011 Budget indicates that the 50 limit will increase t 250 frm 6 April

7 the cmpany issuing the shares must nt be in financial difficulties in accrdance with Eurpean Cmmunity Guidelines fr State Aid. Qualifying Business Activity: a Qualifying Trade which is carried n by the Qualifying Cmpany r a 90% subsidiary f it; r research and develpment carried n by the Qualifying Cmpany r a 90% subsidiary f it, frm which it is intended that a Qualifying Trade will derive. The relevant activities must be carried n whlly r mainly in the UK; fr shares issued n r after 6 April 2011 this test is replaced by a requirement that the cmpany issuing the shares must have a UK permanent establishment. Qualifying Trade: Any trading activity will be a qualifying trade prvided it des nt cnsist t a substantial extent f ne r mre f the fllwing; dealing in land, cmmdities r futures, r in shares, securities r ther financial instruments dealing in gds therwise than in an rdinary trade f whlesale r retail distributin banking, insurance r any ther financial activities leasing r letting r receiving ryalties r licence fees, ther than frm self-created intangible assets prviding legal r accuntancy services prperty develpment farming r market gardening hlding, managing r ccupying wdlands, any ther frestry activities r timber prductin shipbuilding prducing cal prducing steel perating r managing htels r cmparable establishments r managing used as a htel r cmparable establishment perating r managing nursing hmes r residential care hmes r managing prperties used as such prviding services r facilities fr any trade which cnsists t a substantial extent f the activities listed abve and carried n by anther persn (ther than a parent cmpany) where ne persn has a cntrlling interest in bth trades The 23 March 2011 Budget annunced that Finance Bill 2012 will als exclude any trade which cnsists whlly r substantially in the receipt f feed-in tariffs r similar subsidies, unless cmmercial electricity generatin starts befre 6 April This new rule will nt affect shares issued befre 23 March Venture Capital Investments: investments which attract EIS incme tax relief, investments made by venture capital trusts and investments made under the crprate venturing scheme. Wuld yu like t knw mre? Please get in tuch with us at keyntes@keystnelaw.c.uk r call William Rbins n Fr mre infrmatin abut Keystne Law visit: 6

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