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Business Tax  •  Personal tax  •  Tax Planning  •  Tax Relief

Will you lose EIS relief if your investment exits early?

By RJP LLP on 24 January, 2018

Since the Enterprise Investment Scheme (EIS) was first launched for the 1993-94 tax year, well over 26,355 individual companies have benefited and almost £16.2 billion of funds have been raised. To achieve figures like this means that a lot of higher rate taxpayers have been investing in EIS approved companies and benefiting from the tax relief opportunities available.

HMRC data corroborates this. Their records show that over 10,000 investors invested in EIS companies in the tax year to April 2016, representing an 18% increase on the previous year. They also suggest that it is the increased use of crowdfunding platforms and the availability of specific EIS related funds has fuelled this boom.

Generally, when you invest in an EIS approved company, it is possible to obtain generous income tax relief of up to 30% on a maximum annual investment of £1,000,000. However, this requires that the shareholding is held for a minimum of 3 years and the taxpayer has sufficient tax liabilities to warrant the strategy.

EIS investments do not come without their risks and investors must take appropriate advice to understand the implications of investing in early stage companies. In some cases, the company they invest in may perform exceptionally well and an exit may be on the cards sooner than the required 3-year termination date stipulated by the EIS legislation. What happens to the tax relief in these circumstances? Will existing investors who have already received tax relief have to repay the relief already received?

 

Retaining the qualifying criteria for EIS income tax relief

As we have advised in the past, there are strict qualification criteria for EIS and these must be followed in the correct order for all the tax benefits to be realised.  Ordinarily, if EIS shares are disposed of early - because the company is sold or floated – the result will typically be a loss of the tax relief for investors. However, it is possible to enter into pre-sale arrangements to reorganise share capital into a new holding company by way of a share for share exchange with HMRC clearances. Where all qualifying criteria are met, the EIS relief which was available on the old shares can then be attributed to the new shares, enabling the sale of the original company to go ahead without the loss of EIS income tax relief.

Note that HMRC clearance for the share exchange must have been obtained in advance of the transaction being completed, certain complex steps must be undertaken in the correct order, and the share exchange must be completed before the disposal takes place. However, such a pre-sale reorganisation can be useful in saving large amounts of EIS income tax relief from being clawed back.

RJP have advised many investors about the tax advantages of EIS and worked with companies looking to obtain EIS approval. If you have invested in an EIS approved company and seeking tax advice, please contact us at partners@RJP.co.uk.

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