A bit like odds at the start of the football season of Leicester winning the premier league title, one would imagine you would also have been handsomely rewarded had you predicted the change to entrepreneur’s relief that was delivered in the last budget of 16 March 2016.
Many forecast a tightening of the entrepreneur’s relief conditions with either a reduction in the lifetime allowance of £10million or an increase in the tax rate at which capital gains are taxed.
What actually happened caught most commentators by surprise as there was an extension to entrepreneur’s relief for long term investors whereby an eligible individual would get charged at 10% capital gains tax on qualifying disposals made.
Changes to the entrepreneur’s relief
Like the ‘normal’ entrepreneur’s relief, the company must be an unlisted trading company, and the shares must be ordinary shares.
Unlike the ‘normal’ entrepreneur’s relief, the individual must not be an employee or officer of the company, the shares must be newly issued on or after 17 March 2016 and the individual must hold the shares for at least 3 years starting from 6 April 2016.
The above was heralded by many as being on the side of small and medium sized companies as it should ‘in theory’ encourage investment in such companies by individuals who may otherwise not have. But the question must however be asked.
what is the use of the above if the Enterprise Investment Scheme (EIS) is available?
EIS is also targeted at long term investors (as the shares also have to be held for 3 years) and while there are more stringent conditions (for both the company and the individual), where these are met, the benefits significantly outweigh that of the entrepreneur’s investor relief above as:
- Capital gains on other disposals can be deferred.
- There is no capital gains tax to pay on the EIS shares i.e. the applicable tax rate is 0%, not the 10% above.
- Income tax relief is available at 30% of the investment made up to £1million per tax year in the year or prior year.
- Where the EIS shares are sold at a loss, this loss can be set against income instead of being set against capital gains in the year of disposal or prior year.
Is it too good to be true?
It should be noted that EIS relief is not automatic;
- The company should first apply to HMRC under advance assurance including all relevant information.
- Once the shares are issued the company will then need to write to HMRC enclosing a completed EIS1 form.
- If this is accepted by HMRC, then EIS3 certificates are provided which are completed by the company and sent to the relevant investors.
- The investors then claim the relevant relief via their self-assessment tax return.
While the whole process could take 2-6 months to complete, EIS is a relatively common relief now. Data from HMRC for 2014-15 shows that 3,130 companies raised a total of £1,663 million of funds under the EIS scheme. Revised data for 2013-14 show that 2,820 companies raised £1,573million of funds.
How can Menzies help?
As touched on above, there are some very stringent criteria to be met to qualify for EIS. This also cannot be rectified retrospectively.
Therefore, given the benefits detailed above, why not engage with a trusted advisor that has the depth of experience from the cradle of applying for the advance assurance on behalf of the company to claiming the relief on the individual’s self-assessment tax return?
We have worked with many clients looking for the right investment incentive, if you would like to talk through your options please contact us.