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1 S T E L L A R TA X P L A N N I N G wind energy EIS fund

2 Typical investors are those with income taxable at the highest rate, those looking to shelter capital gains and for some elderly investors with a substantial estate looking to obtain some relief from inheritance tax

3 Introduction The Enterprise Investment Scheme (EIS) was introduced in 1994 with the aim of assisting small unquoted trading companies in raising capital. It does so by providing a range of tax reliefs for investors who purchase newly issued shares in these companies. At the time of issue, the company must neither be listed on a recognised stock exchange, nor must there be arrangements in place for it to become quoted, although trading on AIM and Plus Quoted and Traded Markets is permitted. A small company is defined for the purpose of EIS by HMRC using a gross assets test. To qualify, the company should have no more than 15 million prior to the issue of new shares or 16 million immediately after. The company must also employ fewer than 250 people and recent changes to the legislation mean that trading does not have to be wholly and mainly in the UK. There is now a simple requirement that the company has a permanent establishment in the UK. A company can carry on some excluded activities, but these must not be a 'substantial' part of the company s trade. HMRC take 'substantial' 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: dealing in land, in commodities or futures in shares, securities or other financial instruments dealing in goods, other than in an ordinary trade of retail or wholesale distribution financial activities such as banking, insurance, money lending, debt factoring, hirepurchase financing or any other financial activities leasing or letting assets on hire, except in the case of certain ship chartering activities 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) providing legal or accountancy services property development farming or market gardening holding, managing or occupying woodlands, any other forestry activities or timber production receiving Feed In Tariffs (FITs) or similar subsidies and from Finance Act 2014, expected July 2014, the list will include receiving Renewables Obligation Certificates (ROCs) or similar subsidies.

4 What are the pros and cons of an EIS? EIS investments typically give investors access to private equity and venture capital type investments at lower entry values that is normal by structuring funds as collective investment vehicles or discretionary funds. The potential for much larger returns is very attractive especially when combined with the tax reliefs. However, these investments are in much smaller companies than those listed on the London Stock Exchange and carry a larger degree of risk. This risk can be reduced by using a portfolio approach and/or by investing in certain EIS investments which have a high degree of asset backing. Investments must be held for three years in order to maintain the income tax relief but it is not always likely that investors will be able to exit their investment after this time. Depending on the investor s investment strategy, it may be advisable to seek EIS investments that look to offer a number of possible exits to investors after this period. Otherwise, EIS investments should be treated as a long term investment. Who should invest in an EIS? Investors that are looking for exposure to smaller companies and can justify the increased risk by coupling potentially larger returns with the comprehensive tax reliefs should consider EIS. It is important to be comfortable with the underlying nature of the investment and not let the tax incentives sway the decision. These incentives are put in place by Government in order to attract investment into smaller UK companies to compensate investors for the added risk they are taking. That being said, for a higher rate tax payer (45%), if they are able to receive the initial income tax relief on their investment and their investment was to reduce totally to zero, the maximum amount of actual money they could lose would be 42% if their initial investment (utilising loss relief). This means that an investor is not taking as big a risk as may initially be thought. Typical investors are those with income taxable at the highest rate, those looking to shelter capital gains and for some elderly investors with a substantial estate looking to obtain some relief from inheritance tax. The restrictions for obtaining tax relief on pension contributions for those higher earners together with the increase in income tax rates has made EIS investments much more attractive.

5 What are the tax advantages for EIS? There are five tax advantages available following investment in an EIS. 1. Income Tax Relief This is available to individuals only, who subscribe for (although this can be through a nominee) shares in an EIS qualifying company. From 6 April 2011 the relief is 30 per cent of the cost of the shares, to be set against the individual s income tax liability for the tax year in which either the investment was made ( unapproved fund ) or the date the fund closes ( approved fund ). Relief can be claimed up to a maximum of 1,000,000 invested in such shares, giving a maximum tax reduction in any one year of 300,000 providing you have sufficient income tax liability to cover it. Carry back It is now possible to carry back income tax relief to the previous tax year. The investor may claim to have some or all of the relief in the year preceding that in which the shares were issued. There is no limit on the amount which may be carried back, but the relief available in the earlier tax year will be subject to the overriding limit for relief for that year. Qualifying period The shares must be held for at least three years ( the qualifying period ) or income tax relief will be withdrawn. If the qualifying trade started after the shares were issued, the period is three years from the date the trade actually started. 2. Capital Gains Tax Exemption If you have received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after the qualifying period, any gain on the shares is free from Capital Gains Tax. 3. Loss Relief If the shares are disposed of at a loss, you can elect that the amount of the loss, less any income tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year. Loss relief can also be set off against any capital gains. 4. Capital Gains Tax deferral relief The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of up to one year before or three years after the gain arose. There are no minimum or maximum amounts for deferral. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation. 5. Inheritance Tax Exemption 100% relief is available in the event of death of an investor provided that EIS qualifying shares have been held for a minimum of two years. Disposal EIS invest in unquoted companies and for this reason it is highly unlikely that investors will be able to exit in the short or medium term. If it is a single company, then an investment will not be realised until either a flotation or a sale of the business. If it is a fund, then any sale will be at the discretion of the fund manager. However, in all instances EIS should be considered a very illiquid investment.

6 Types of EIS offering EIS can broadly be split into four areas: Single Company EIS A single company EIS is often the highest risk as it invests in one individual company usually with a specific trading activity. An investor s return will depend upon the performance of that one underlying company. Usually unlisted, there will often be no exit route until the company is either floated or sold. EIS portfolio An EIS portfolio is generally a managed service that invests in a number, often a maximum of 15, different companies. It will be professionally managed, normally on a discretionary basis, and EIS tax relief is available as each individual investment is made and not when the portfolio service is first invested in. Unapproved EIS fund Similar to the approved fund, the unapproved fund will generally have four or five different underlying companies. Income tax relief is given each time an underlying investment is made. Capital gains can also be deferred each time an investment is made. Approved EIS fund An approved fund will generally have four or more different underlying companies. EIS clearance is effectively received from HMRC prior to the fund launch but in no way does this constitute approval of its activities. This correspondence has no bearing on the underlying investments. However it means the income tax relief is given in the year the investment is made by the investor. CGT deferral is not available until the manager has made the underlying investments. An approved fund has a requirement to invest all of its funds raised within 24 months. Approved or Unapproved The difference between an approved and an unapproved fund is the way in which HMRC allows for income tax relief to be reclaimed and is not in anyway a reference to the quality of the fund. In an unapproved fund an investor can claim income tax relief when the underlying investment is made. Relief can also be carried back to the previous tax year. In an approved fund the investor must wait until the fund has completed its investments and can then claim income tax relief for the year in which the investor subscribed to the fund. The majority of EIS funds in the market today are unapproved funds as they offer the greatest flexibility for investors on claiming tax relief.

7 What are the long term tax planning uses for an EIS? EIS has been used extensively in the past to managed investors capital gains problems by deferral. However, more recently, investors are using them for the potential returns coupled with tax free gains and income tax relief on the way in. An EIS deferral investor will typically reinvest the proceeds of into a new one as a method of permanently deferring the gain. How can I make sure I get the best EIS for my client? It is always imperative to match the investment to the client s expectation, objectives and overall wealth strategy. Although the tax reliefs are hugely appealing, the underlying investment must be within their asset allocation boundaries and match their income and growth requirements. Different investment houses offer different investment strategies, some with income and others capital growth; some more speculative and some more asset backed. It is important to understand the liquidity issues with different offerings as well. Claiming EIS relief The EIS company completes and submits an EIS 1 form to HMRC. Once the claim is accepted, an EIS 2 form is issued to the company. The EIS 2 authorises the company to issue an EIS 3 Certificate to the investor confirming that they are entitle to relief. The investor completes a claim on the back of the EIS 3 and sends this to his own HMRC office who will effect the Income Tax relief by either adjusting the investor s PAYE code, making a tax payment or agreement to offset the relief against outstanding tax liabilities. NEXT STEPS To request a copy of the Information Memorandum please contact Stellar Asset Management Limited Telephone: info@stellar-am.com Web: Disclaimer Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that in due course they read the Information Memorandum and fully understand the risk factors before making any investment decision. This document and its contents are confidential and it is being supplied to you solely for your information and may not be copied, reproduced or further distributed to any other person or published in whole or in part, for any purpose except by an FCA authorised person in compliance with the rules of the FCA. This document may be incomplete or condensed and it may not contain all material information including information about risks associated with this investment. The information in this document is subject to updating, revision, amendment and further verification. Any decision to invest in this opportunity must only be made on the basis of the Information Memorandum. Recipients of this document who intend to participate in the proposed investment opportunity are reminded that no reliance may be placed by any person for any purpose whatsoever on the information contained in this document or on its completeness, accuracy or fairness.

8 stellar asset management LIMITED 4 Princes Street, London W1B 2LE t e info@stellar-am.com Authorised and Regulated by the Financial Conduct Authority S T E L L A R TA X P L A N N I N G