Your Industry  

What you can invest in and what you get in return

This article is part of
Guide to Enterprise Investment Schemes

EIS is government initiative designed to promote investment into smaller unquoted companies, which must meet certain criteria set by HM Revenue & Customs in order for investors to receive certain tax advantages.

A small company is defined for the purpose of EIS by HMRC using a gross assets test, the thresholds for which have been increased in recent years.

To qualify the company should have no more than £15m prior to the issue of new shares or £16m immediately after, and must also employ fewer than 250 people. Recent changes to the legislation mean that trading does not have to be ‘wholly and mainly’ in the UK, but merely have a ‘permanent establishment’ in the UK..

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A company can carry on some excluded activities, but these must not be a ‘substantial’ part of the company’s trade, which HMRC takes to mean more than 20 per cent of the company’s activities.

Most trades qualify, but some do not. Those that do not are termed ‘excluded activities’ and are principally:

1) dealing in land, in commodities or futures in shares, securities or other financial instruments;

2) dealing in goods, other than in an ordinary trade of retail or wholesale distribution;

3) financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities;

4) leasing or letting assets on hire, except in the case of certain ship-chartering activities;

5) receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity);

6) providing legal or accountancy services;

7) property development;

8) farming or market gardening;

9) holding, managing or occupying woodlands, any other forestry activities or timber production; and

10) receiving feed-in tariffs (FITs) or similar subsidies.

In terms of how retail investors access these companies, according to Mr Sedgwick there are two types of EIS fund: ‘approved’ and ‘unapproved’. These are not regulatory terms but rather tax terms relating to whether or not the ‘fund’ has registered with HMRC.

Both fund types allow retail investors access to the underlying EIS companies through a collective. These are not corporate structures or ‘collective investment schemes’ per se, but they are covered by specific Treasury rules and thus behalf like a fund and display the same pooled investment characteristics.

What you can invest - and what you get

There is no minimum investment for an individual to qualify for tax relief, but Mr Kiernan says the majority of investments tend to be between £2,500 and £10,000 and spread across a number of underlying investments in the fund.

Investors are able to make personal investments into EIS of up to £1m in any one tax year and they need not be UK resident.

Government tax reliefs for investors include:

1) income tax relief of 30 per cent on individual investments - so a £100 investment effectively costs just £70;

2) gains are paid free of capital gains tax once shares are held for at least three years;