PRESERVING VALUE IN EIS AND OTHER RELIEFS ZOE FATCHEN
THREE KEY RELIEFS Enterprise Investment Scheme (EIS) Venture Capital Trusts (VCT) Seed Enterprise Investment Scheme (SEIS) Entrepreneurs Relief
KEY RELIEFS Anticipated in the early stages To be preserved in: subsequent funding rounds commercial operations preparation for an exit
ENTERPRISE INVESTMENT RELIEF (EIS)
EIS THE BENEFITS Immediately: 30% UK income tax relief on investment CGT deferral for reinvested gains On disposal: CGT exemption on disposal of shares after 3 years CGT loss relief to use against income
EIS THE CONDITIONS There are lots. Always take advice for example: An individual subscribes cash for new ordinary shares In a qualifying SME company with which they are not connected For 3 years until the termination date To fund a qualifying business activity And the company is independent with only qualifying subsidiaries VCT conditions are broadly similar (10% eligible shares )
EIS FINANCIAL LIMITS No minimum investment (since April 2012) An individual can invest up to 1m in any tax year A company can receive up to 5m in any 12 months 12m in a lifetime ( 20m for knowledge-intensive companies) Including related businesses
Not entitled to more than 30% of issued share capital (ords and all) voting rights in any investee company or its subsidiaries Take into account associates entitlements Can invest in many companies Investor/associates must not be employed, can become a director Business angel exemption reasonable remuneration
EIS: KNOWLEDGE-INTENSIVE COMPANIES Up to 500 employees for a knowledge-intensive company Where the R&D or innovation costs were: 15% + of the operating costs in at least one of the last 3 years, or 10% + in each of the last 3 years (ending before the last accounts date); It is creating IP, which within 10 years is expected to drive the greater part of the business; or employees with a relevant Masters or higher degree: carry out R&D and Are at least 20% of the company s FTE workforce
EIS AGE LIMITS First commercial sale Not more than 7 years before the investment (10 for a K-I C) Unless EIS/VCT investment is >50% average turnover for the last 5 years and Used to enter a new geographical/product market; or Previous EIS/VCT funding before the age limit and New funding is for similar purposes
EIS AVOIDING THE TRAPS Individuals invest direct Working capital only Avoid restructuring in the first 3 years if possible Beware returns of value repaying loan note capital, asset transfers at less than market value Always check for EIS impact Take care with royalties
EIS: A NOTE ON ROYALTIES Excluded activities include: leasing; receiving royalties or license fees; Unless: derived from self-generated IP; or royalties are really payment for maintenance or marketing support services. critical analysis of income streams is key (you may do this already).
Self-generated IP: The asset, or the greater part of its value Was created by the company which has issued the shares, or by a company which was its subsidiary during the period it created it, or when it created the greater part of it in terms of value. OK to buy a subsidiary with an early stage IP asset Right to exploit it can be shared jointly, e.g. invention from: a collaborative project, or work an employee where company and employee may be registered as joint owners of the patent.
EIS STRUCTURING AGREEMENTS Can be an overseas trade: must have a substantial UK permanent establishment. Do not use funds to buy in a qualifying trade Investors can have different subscription prices But beware different share rights Up to 20% excluded activities can separate into different companies but beware disqualifying arrangements.
SEIS STRUCTURING AGREEMENTS Take care if subsequent (EIS or VCT) rounds will follow No pre-arranged exits No disqualifying arrangements No tax avoidance
SEED ENTERPRISE INVESTMENT RELIEF (SEIS)
SEIS THE BENEFITS For very small, early stage companies Like EIS, but better tax reliefs: Income tax relief up to 50% Claim 5 years forward, one year back (CGT exemption and deferral as for EIS)
SEIS THE CONDITIONS More restricted: Investments up to 100,000 per tax year Stricter age limits Spend 70% of SEIS funds before investing more under EIS/VCT Small investments, large benefits HMRC may enquire
ENTREPRENEURS RELIEF (ER)
ER THE BENEFITS 10% effective rate of capital gains tax On the first 10m of lifetime gains On the sale of qualifying assets Great for individual founders and EMI shareholders
ER THE CONDITIONS Own at least 5% of the ordinary share capital By nominal value/voting rights In a trading company or the holding company of a trading group Unless EMI shares Be an employee or officer of the company Throughout the last 12 months Sell shares/asset used in business/share of business
ER AVOIDING THE TRAPS Beware part-disposals Spouses and employment Beware the last subsidiary standing Is it still a trading group? Take care with share-for-share exchanges and refinancing, e.g. deferred shares issued to a bank
ER STRUCTURING AGREEMENTS Consider using options 5% rule personal company If met for some shares in the company, is met for all Beware tax-avoidance schemes e.g. consortium companies funny shares
CONTACTS ZOE FATCHEN Direc tor UK Tax & Funds +44 (0)121 393 0098 zoe.fatchen@gowlingwlg.com TOM RANK Senior Associate UK Tax & Funds +44 (0) 121 393 0576 tom.rank@gowlingwlg.com gowlingwlg.com Gowling WLG (UK) LLP is a member of Gowling WLG, an international law firm which consists of independent and autonomous entities providing services around the world. Our structure is explained in more detail at gowlingwlg.com/legal
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