Qualifying individuals: EIS, SEIS & VCTs

EIS

Investors must be individuals to qualify for income tax relief. In addition, they must be resident in the UK if they are to qualify for CGT deferral relief.

 

Trustees of certain trusts can obtain CGT deferral relief, but not income tax or CGT-free sales.

Broadly, the individual must not be connected with the company in which he or she invests in a period beginning two years before the share issue and ending three years after the later of the issue of the shares or commencement of trade.

This means:
  • The investor and his or her associates must not own more than 30% of the ordinary shares, or the voting rights, or the total issued share capital, or assets on a winding up. (Associates include business partners and direct relations, being spouse or civil partner, grandparents, parents, children and grandchildren — but not brothers or sisters — in addition to trustees of certain trusts.)
  • The investory must not:
    • be a paid director of the company except in limited circumstances;
    • receive value from the company, such as repayment of certain loans, receipt of excessive dividends, assets transferred at an under/over value, repayment of share capital: and/or
    • an employee of the company or any of its 51% subsidiaries.  

All investors seeking relief under EIS have to be independent from the qualifying company at the time of the relevant share issue. If the individual holds shares at the time of the EIS investment, he or she must have acquired those shares as either subscriber shares or from a previous issue qualifying for EIS, SEIS or Social Investment Tax Relief.

The rules are complex and have not been covered here in detail. This guide provides an overview of the rules only and professional advice should always be sought.

In addition, not all the above conditions apply if only CGT deferral is being claimed.

Seed EIS

The rules governing qualifying individuals for SEIS are summarised as follows:

  • The investor must not own more than 30% of the ordinary share capital, the issued share capital, the voting power, or rights to assets on a winding up.
  • Past (but not current) employees to qualify for relief.
  • Directors who qualify under SEIS continue to qualify under EIS (provided the EIS shares are issued before the third anniversary of the last date of issue of SEIS shares).

VCT

To receive VCT income tax relief an investor needs to be aged 18 or over. Trustees cannot qualify for this relief. There are complex provisions that can deny income tax relief where the investment is financed by loans.

VCTs/EISs are unquoted investments which are highly illiquid, with investors potentially having difficulty in realising their investment at a given time. They should therefore only be considered as a long term investment, i.e over five years. They also carry the risk of potentially losing all or part of your capital investment and therefore the return of your capital is not guaranteed. 

You don’t have to be an investment professional or venture capital specialist to take advantage of EIS and/or SEIS. One of the great things about EIS and SEIS is that they present ordinary investors with the opportunity to invest in exciting growth companies.

An overview of the tax incentives.

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Adrian Walton

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