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View the related Tax Guidance about Enterprise Investment Scheme (EIS)

SEIS and EIS 鈥� overview

SEIS and EIS 鈥� overviewThe seed enterprise investment scheme (SEIS) and enterprise investment scheme (EIS) are very similar schemes which offer substantial tax incentives to investors in companies which qualify. The tax incentives for SEIS and EIS investments are intended to encourage investment in high-risk, small, unquoted companies that may find it difficult to raise finance without the tax incentives being offered.There are stringent conditions imposed upon companies wishing to qualify for the scheme. Tax advice on the schemes should be undertaken and supervised by a suitably experienced practitioner. Terms of engagement for SEIS and EIS work should be carefully drafted in particular because conditions are tested on an ongoing basis. Therefore, tax advisers should ensure that they limit their liability in respect of any future action taken by the company which could affect qualification for the schemes.There are no particular tax reliefs available to the company. The tax reliefs are intended for the investor to incentivise investment in a high-risk, early stage company. The availability of tax relief, together with a solid business plan, is a strong draw for investors. Many investors are sophisticated serial investors.See also the Gains and Losses on EIS and SEIS shares video for useful summaries of the regimes.Raising finance through SEIS and EISSEIS focuses investment in the very early stage, new businesses that may face particular difficulties in raising finance as they are seen as being very high-risk. EIS is also intended for small companies but they can be a little larger and

Gain deferred through EIS becomes chargeable

Gain deferred through EIS becomes chargeableThe enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies.A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. For a summary of the tax reliefs that are available to the investor, see the Enterprise investment scheme tax relief guidance note.Any profit on the disposal of the EIS shares themselves is likely to be exempt from capital gains tax under the rules discussed in the Enterprise investment scheme tax relief guidance note.CGT deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares. This is discussed in detail in the Enterprise investment scheme deferral relief guidance note. Under EIS deferral relief (also known as EIS re-investment relief), deferred gains are set aside or 鈥榝rozen鈥� until the occurrence of specified future events. The base cost of the replacement asset (ie the new EIS shares) remains unchanged. This frozen gain crystallises and becomes chargeable in the year of a 鈥榗hargeable event鈥�. Usually, this will be on the sale of the EIS shares. When the EIS shares are sold, there will sometimes be a gain on the shares themselves but, in addition, this disposal will also crystallise the frozen gain.This guidance note discusses the triggers which cause the capital gain deferred on the subscription for EIS shares to crystallise.Chargeable eventsThe following are chargeable events:鈥�gift of the EIS shares, unless the gift is to the individual鈥檚 spouse

Deferral of capital gains via reinvestment

Deferral of capital gains via reinvestmentWhy defer a gain?An individual鈥檚 net taxable income and chargeable gains for the tax year influence the rate of tax payable on their capital gains. See the Introduction to capital gains tax guidance note.Depending on the nature of the asset that is subject to disposal, this can result in the individual paying capital gains tax (CGT) at 20% or 28% (reduced to 24% from 6 April 2024 onwards) in tax years where their taxable income and gains exceed the basic rate band, but only 10% or 18% on gains in years where their net income and gains are lower than that band. If a gain is covered by the annual exemption, no CGT is due. See the Introduction to capital gains tax guidance note.The basic rate band is £37,700 for the 2023/24 and 2024/25 tax years, but this may be extended by personal pension contributions or donations to charity via gift aid. See the Proforma income tax calculation guidance note.The annual exemption is £6,000 for 2023/24 and £3,000 for 2024/25. To optimise their CGT position, a taxpayer can reinvest the proceeds from the sale of an asset into the purchase of a qualifying asset and elect for the gain to be rolled into those replacement assets.When the replacement asset is subject to disposal, or possibly where the investment conditions are broken, the deferred gain falls back into charge to CGT. This may be some years after the original gain arose and in many cases,

Weekly tax highlights 鈥� 2 September 2024

Weekly tax highlights 鈥� 2 September 2024Direct taxesEU approves extension of EIS and VCTThe European Commission has approved the Government鈥檚 extension of the Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT) until 2035.The sunset dates for the EIS and VCT were extended by FA 2024 to 5 April 2035 from a date to be appointed. The Commission's approval for the extension is required under the Windsor Framework and this has now been granted as it has decided to raise no objections.See Simon鈥檚 Taxes E3.101, E3.201CIOT response: Abolition of furnished holiday lettings regime 鈥� draft legislation for consultationThe CIOT has published its response to the consultation on the draft legislation to abolish the furnished holiday lettings (FHL) tax regimeThe key points raised in the response include:鈥�clarification is needed on the policy intent regarding the tax status of furnished holiday lettings going forward to provide certainty and avoid costly disputes in relation to claims for trading status鈥�the draft legislation should clarify the position regarding business asset disposal relief (BADR) for disposals relating to pre-commencement FHL businesses, including whether there is a deemed cessation on 5 April 2025鈥�guidance is needed on the application of the 50:50 income splitting rules in ITA 2007, s 836 to former FHL properties owned jointly from 6 April 2025, and the ability to backdate section 837 elections is suggested鈥�confirmation is sought on various technical points, such as the treatment of the "relevant period" for new FHLs in 2024/25, eligibility for

Seed enterprise investment scheme 鈥� withdrawal of relief

Seed enterprise investment scheme 鈥� withdrawal of reliefThe seed enterprise investment scheme (SEIS), like the enterprise investment scheme (EIS), is designed to encourage individuals to invest money in shares issued by qualifying unquoted companies trading wholly or mainly in the UK.HMRC has published some basic guidance. See the Seed enterprise investment scheme (SEIS) 鈥� introduction guidance note for an overview of the scheme and for details on how to make a claim for relief.Circumstances under which SEIS relief may be withdrawn or reducedThere are a plethora of conditions that must be met in order for SEIS relief to be given and several conditions apply over periods of time (see the Seed enterprise investment scheme 鈥� scheme criteria guidance note). It is possible for conditions to be breached after relief has been claimed by the investor. Because of this, there are extensive provisions for the withdrawal of relief. Withdrawal applies to all forms of relief given through SEIS and must be applied as if the relief had never been given.SEIS relief is withdrawn if:鈥�the shares are sold to someone other than the spouse / civil partner鈥�a call option is granted in respect of the shares鈥�the investor acquires a put option in respect of the shares鈥�the investor or their associate receives 'value' from the company, or a person connected with the company鈥�the company carries on a trade that was previously carried on in the period by someone other than the company or a qualifying subsidiary鈥�the

Weekly case highlights 鈥� 20 May 2024

Weekly case highlights 鈥� 20 May 2024These are our brief notes and thoughts on cases published in the last week or so which caught our eye and are likely to be of particular interest to tax practitioners. Full case reports and commentary on most of these cases will be included within our normal reference sources in the coming weeks.Income taxOsmond and another v HMRCThis is an interesting case on the transactions in securities rules. The company involved had a complicated history, starting out as the operators of a sports club but, by the time of the transactions in question (20 years later) operating as an investment company holding listed shares. The taxpayers were serial investors in enterprise investment scheme (EIS) companies and had obtained EIS relief on the issue of their shares. They were therefore in principle entitled to EIS disposal relief if they sold their shares and they had taken great pains through various reorganisations to ensure that they retained entitlement to it. In 2015, concerned that the relief would be withdrawn on a change of government, they entered into a share buy back with the explicit intention of using the disposal relief while it was still available. They treated the buyback as capital, giving rise to a gain which would be exempt. There was no dispute that this was a transaction in securities or that the taxpayers obtained an income tax advantage, so the main issue in determining whether the transactions in securities provisions applied was whether

Utilising capital losses

Utilising capital lossesWhy capital losses are importantCapital losses are usually set against the capital gains that arise in the same year as the loss, reducing the total taxable gains for that year. Losses not used in this fashion are normally carried forward to be set against the next available gains.However, in certain circumstances, those losses may be blocked, restricted, carried back to earlier tax years or possibly treated as if they were income tax losses (see below).Where the taxpayer is subject to more than one rate of capital gains tax in a single tax year, they can choose which gains should be reduced by their capital losses so that their tax liability is reduced to the minimum possible.If a taxpayer makes a claim to defer chargeable gains for an earlier year, the use of losses may be disturbed, which can have a knock-on effect for several tax years.Capital losses must be quantified and claimed before they can be used. See the Use of capital losses guidance note for how capital losses arise and how to claim them.Identify special lossesWhere the taxpayer has made a capital loss, you first need to determine if the loss arises under one of the special circumstances that limit or expand the use of that loss, see below.EIS, SEIS or SITR investmentsEnterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) are designed to encourage investment by individuals in unquoted trading companies. The social investment tax relief scheme (SITR, also known as SI tax relief)

Timing of disposal for capital gains tax

Timing of disposal for capital gains taxDate of disposalThe date of the disposal determines the period in which the gain is subject to capital gains tax (CGT). When the rates of CGT change, the determination of the date of disposal can also affect the rate of CGT that applies to the gain.For the rates of CGT, see the Introduction to capital gains tax guidance note.The rules for determining the date of disposal vary according to the type of disposal made.Type of disposalUnder contractWhere an asset is disposed of and acquired under a contract, the time of the disposal and acquisition is the time when that contract is made, ie the date contracts are exchanged. It is not the date of the completion of the contract, or time of the conveyance or transfer of the asset (if different). However, if the contract is never completed, the disposal never takes place. In the case of a conditional contract, the time of disposal and acquisition is the time when the condition is satisfied. This applies in particular to a contract that is conditional on the exercise of an option. As such, although the date of disposal is fixed based on the date on which the contract becomes unconditional, the disposal only becomes taxable in that earlier period when the asset is transferred (ie the contract is completed). This has led to problems for HMRC where the transfer of the asset does not occur until years after the contract becomes unconditional as the

Conditions to be met by the EIS investor

Conditions to be met by the EIS investorTax reliefs under the enterprise investment scheme (EIS) can be summarised as follows:鈥�income tax relief for the investor of up to 30% of the amount invested鈥�disposals of EIS shares after three years may be free from CGT鈥�capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares鈥�losses on EIS shares may be offset against taxable income鈥�EIS investments should qualify for IHT business property relief after two years鈥� ownershipEIS reliefs are available to individuals only, except for EIS deferral relief which is also available to trustees. EIS reliefs are available to UK residents. UK non-residents only qualify for some EIS reliefs; they are not eligible for deferral relief or relief for on losses on disposals of EIS shares. With the exception of EIS deferral relief, EIS reliefs are available only to outside investors.For more detail on the tax reliefs, see the Enterprise investment scheme tax relief and Enterprise investment scheme deferral relief guidance notes.Note that a sunset clause for EIS income tax relief has been introduced. This ensures that income tax relief will no longer be given to subscriptions made on or after 6 April 2035, unless the legislation is renewed by Treasury Order. Ongoing qualifying conditionsTo obtain (and retain) EIS tax reliefs, certain conditions must be met by the investor for a minimum period of time. This is usually three years from the date of the share issue but if

How to calculate the clawback of EIS income tax relief

How to calculate the clawback of EIS income tax reliefThe enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies.A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. They can benefit from the following tax reliefs:鈥�income tax relief for the investor of up to 30% of the amount invested and disposals of EIS shares after three years may be free from CGT (see the Enterprise investment scheme tax relief guidance note)鈥�capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares (see the Enterprise investment scheme deferral relief guidance note)鈥�losses on EIS shares may be offset against taxable income (see the Losses on shares set against income guidance note)鈥�EIS investments should qualify for IHT business property relief after two years鈥� ownership (see the BPR guidance note)This guidance note discusses the calculation of the amount of income tax relief that might be withdrawn or reduced in certain situations.IntroductionBroadly, income tax relief is withdrawn if, within three years of subscription (or three years from the commencement of the trade, if later):鈥�the shares are gifted or sold to someone other than the spouse / civil partner鈥�the investor is granted an option binding the grantor to buy the shares or the investor grants an option which on exercise obliges them to sell the shares鈥�the investor or their 鈥榓ssociate鈥� receives 鈥榲alue鈥� from the company, or