PT 35 EIS Scheme

Question 1

What are the income tax consequences of subscribing for EIS shares?

Answer 1

Income tax reducer
* 30% × lower of
– amount subscribed
– maximum investment eligible for relief (£1m / £2m if knowledge intensive)
* Can only reduce income tax liability to nil
* Can carry back the EIS subscription to the previous tax year
* Provided limit for that year not exceeded

Question 2

What are the conditions for subscription of EIS shares?

Answer 2

• Must not be ‘connected’ with the EIS company (ie must not be an employee nor hold more than 30% shares in the company)
  Existing directors who are paid
  remuneration will not qualify for relief.
• Must own the shares for at least three years (otherwise income tax reducer
  withdrawn)
• Must not hold any existing shares in the company (unless qualified for EIS/SEIS/SITR or subscriber shares)

Question 3

What are the income tax consequences of selling EIS shares?

Answer 3

• If sold within three years
• Clawback is the lower of:
  – Original income tax reducer
  – 30% × sale proceeds received
  (only applicable if sold for a loss)
• Income tax reducer clawed back by an assessment for the tax
  year in which relief given
• No withdrawal of income tax reducer if sold after three years
• Can claim for loss to be set against income of current year and/or preceding year

Question 4

What makes a qualifying EIS company?

Answer 4

• An unquoted trading company with a permanent establishment in the UK.
• Not prohibited trade
• Company’s assets must not exceed £15m before and £16 million after the share issue.
• fewer than 250 FTE employees (500 knowledge intensive).
• Company cannot have raised more than £5m through EIS/SEIS/VCT/SITR in previous 12 months (£10m for knowledge intensive company).
• lifetime limit funds raised of £12m / £20m (knowledge int.)
• share issue within seven years of first commercial sale (ten years for knowledge intensive companies). This restriction does not apply if there was a previous EIS/SEIS/VCT/SITR investment in this period.
• The cash raised by the issue of EIS shares must be used for the trade within two years.

Question 5

Prohibited trades?

Answer 5

financial trades, farming, market gardening, hotel and property development.

Question 6

EIS

Company’s assets must not exceed…..

Answer 6

£15 million before and £16 million after the share issue.

Question 7

What’s the risk to capital condition?

Answer 7

To qualify for EIS income tax relief, it must be reasonable to conclude :
* The objectives of the company are to grow and develop its trade in the long term.
* There is a significant risk of a loss of capital greater than the return on the investment, taking into account the value of the EIS relief.

The legislation is particularly useful for EIS, both for the conditions for a qualifying EIS company and the EIS relief.