ENTERPRISE INVESTMENT SCHEME ("EIS")
Eden Pharma has sought assurance under the Enterprise Investment Scheme (EIS) which is a Government scheme that is designed to help eligible start-up companies raise finance by offering a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.
There are five current EIS tax reliefs available to investors in Eden Pharma under the EIS, which are summarised below:
Upfront income tax relief
UPFRONT INCOME TAX RELIEF
30% income tax relief on the amount invested, provided that the shares are held for a minimum of three years. The maximum amount on which investors may obtain income tax relief can be withdrawn if the investor becomes a ‘Connected Person’ or the company ceases to be qualifying within three years of the share issue.
CGT exemption on capital gains on the disposal of an EIS investment, provided that the shares have been held for at least three years.
Inheritance Tax (IHT) exemption providing the shares have been held at least two years from the date of issue and are held at the time of death.
UP TO 45% LOSS RELIEF AVAILABLE
Losses on the disposal of shares can be offset against either taxable income, or chargeable gains on other assets.
UNCAPPED CGT DEFERRAL RELIEF
Unlimited capital gains tax (CGT) deferral, provided the investment is made in the period beginning 12 months before, and ending 3 years after, the date of the disposal subject to CGT.
INCOME TAX RELIEF
INITIAL INVESTMENT £10,000
LESS INCOME TAX RELIEF @ 30% (£3,000)
NET COST OF INVESTMENT £7,000
Qualifying investors can credit the amount of funds subscribed for eligible shares against their total liability to Income Tax for the tax year that shares are issued and also the preceding year.
Relief is available against a United Kingdom Income Tax liability, irrespective of whether or not the investor is resident in the UK.
Please note, the amount of relief given cannot exceed an investor’s tax liability. A qualifying individual can claim to ‘carry back’ up to £500,000 of their EIS investment to the previous tax year, thereby enabling Income Tax already paid to be reclaimed.
‘Carry Back’ allows that, if no investment had been made in the previous tax year, up to £1,000,000 can be invested in the current tax year.
CAPITAL GAINS TAX RELIEF
IREALISED VALUE OF SHARES AFTER 3 YEARS £25,000
LESS ORIGINAL GROSS INVESTMENT £10,000
PROFIT FREE OF CAPITAL GAINS TAX £15,000
Any capital gain accruing to the original investor on disposal of their shares is exempt from Capital Gains Tax if the shares have been held for at least 3 years. Please be aware that if no claim to Income Tax relief is made, then subsequent disposal of the shares will NOT qualify for exemption from Capital Gains Tax.
CAPITAL GAINS TAX DEFERRAL
GROSS INVESTMENT £10,000
LESS INCOME TAX RELIEF £3,000
COST OF INVESTMENT £7,000
CAPITAL GAINS TAX LIABILITY DEFERRED £2,800
* CGT ASSUMED AT 40%; THE GAIN IS DEFERRED UNTIL THERE IS A CHARGEABLE EVENT, SUCH AS A DISPOSAL OF EIS SHARES OR, IF EARLIER, A BREACH OF THE E.I.S. RULES.
NET INITIAL COST OF INVESTMENT £4,200
The liability to Capital Gains Tax arising on the disposal of any asset may be deferred by investing the gain in eligible EIS shares. Investment must be made within the period beginning one year before and ending three years after the event which gives rise to the gain being deferred.
Although there is a limit of £1,000,000 for Income Tax relief and Capital Gains Tax relief there is NO LIMIT on the amount of gains that can be deferred.
There are no minimum or maximum amounts for deferral. Nor does it not matter whether the investor is connected with the company. Unconnected investors may claim both Income Tax relief and Capital Gains Tax deferral relief.
There is no minimum period for which 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 EIS legislation).
LOSS RELIEF (WORST CASE SCENARIO)
REALISED VALUE OF SHARES £0 (NIL
GROSS INVESTMENT IN SHARES £10,000
LESS: INCOME TAX RELIEF @ 30% £3,000
LOSS BEFORE TAX RELIEF £7,000
TAX RELIEF @ 40%* £2,800
* ASSUMED NET LOSS OFFSET AGAINST OTHER INCOME TAXABLE AT 40% AS OPPOSED TO CHARGEABLE GAINS WHICH ARE TAXABLE AT 28%
NET COST OF INVESTMENT £4,200
If an original investor disposes of their shares at a loss, the net loss (after EIS Income Tax relief) may be set against other taxable income or chargeable gains (at the election of the investor).
INHERITANCE TAX RELIEF
If the investment has been held for at least two years before death, the investment should, in most cases, be entirely free from inheritance tax and with the other benefits of the EIS, the effective cost of investment may be reduced to nearly zero.legislation).
Please note, the information above is not exhaustive, is intended as an outline only and may be subject to change in the future. Further, nothing in this section constitutes investment, tax or legal advice. The illustrative tables above are examples only and are not indicative of actual cases.