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Tax incentives for investment in shares and securities


Two important incentives designed to encourage equity investment in small and medium sized companies companies are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These incentives provide special income tax deductions, capital gains tax and loss relief for investors who subscribe for new sharrs issued by certain unquoted small or medium-sized companies:(EIS) and in very early stage small companies (SEIS).

There are four 'tax advantaged' schemes which offer tax advantages to qualifying schemes for acquiring share options or full shares.

These schemes are summarised below. For further information, see Tax incentives for investment.

Enterprise Investment Scheme (EIS)


This relief is: available to individuals, who subscribe for a minimum investment of £500 worth of shares in any one company in any one tax year, are entitled to a tax deduction of 30 per cent of the cost of the shares. Relief can be claimed up to a maximum of £500,000 invested in such shares, giving a maximum tax reduction in any one year of £150,000 providing the individual has sufficient Income Tax liability to cover it.

Strict conditions as to eligibility apply; individuals must not work for or be "connected" to the company; the company must not carry on an excluded trade.
EIS also gives exemption from capital gains tax arising on EIS shares, provided the shares are held for the required period. Capital gains tax deferral is available on any gain arising on other shares which is re-invested into EIS shares in the period of one year before and three years after the gain arose. Income tax relief from any loss incurred on EIS shares is also available.The potential income and capital gains tax reliefs may therefore come to 58%.

Tax relief will be withdrawn unless the share are held for three years from the date the shares were issued or if the qualifying trade started after the shares were issued, three years from the date the trade actually started.

A company may receive a maximum annual sum of £2m through the scheme.
For further information, see: http://www.hmrc.gov.uk/eis/part1/1-2.htm

Seed Enterprise Investment Scheme (SEIS)


This  relief came into effect for the 2012 tax tear and is designed to encourgae investment in very early stage companies. SEIS investors may invest up to £100,000 in a single tax year which can be spread over a number of companies. Investors are entitled to 50% tax relief in the tax year the investment is made.

As with EIS, SEIS also gives exemption from capital gains tax arising on EIS shares, provided the shares are held for the required period. Capital gains tax deferral is available on any gain arising on other shares which is re-invested into EIS shares in the period of one year before and three years after the gain arose. Income tax relief from any loss incurred on EIS shares is also available.The potential income and capital gains tax reliefs may therefore come to 78%.

Any one company may raise no more than £150,000 in total via SEIS investment. The company must have fewer than 25 employees. The company’s trade must be no more than two years old. The company must have assets of less than £200,000.
Other conditions are similar to those for EIS. For further information, see:
http://www.hmrc.gov.uk/seedeis/background.htm#1

See our section on Equity funding of a company.

Tax-advantaged share schemes

There are four 'tax-advantaged' share schemes which provide employees and employers with income tax and National Insurance advantages, subject to the schemes meeting the legislative criteria and approval by HMRC.

Two schemes relate to share option schemes, whereby an employee has a right to purchase shares at a fixed price:

* Company Share Option Plan

* Enterprise Management Incentive

The other share acquisition schemes are:

* Save As You Earn (SAYE or Sharesave)

* Share Incentive Plan (SIP)

Shares acquired under these schemes are generally free from income tax and National Insurance contributions.

The acquisition of shares and other corporate securities in connection with an employment other than through one of the above schemes are commonly referred to as ‘unapproved’ schemes’. Such schemes do not attract income tax or National Insurance advantages.

Further information is available from the HMRC Employee Share Schemes User Guide

What’s new item on this topic [see What’s new page or archive for full item]:

06/12/201: Withholding tax exemption for ‘private placements’

The Chancellor’s Autumn statement contained a brief paragraph [1.170] which mentioned the Government’s commitment to reducing barriers to investment in the UK and announced a ‘new targeted exemption from withholding tax for interest on private placements – a form of long-term non-bank debt financing’.

The withholding tax exemption for interest on private placements will be introduced in Finance Bill 2015.

Comment: no detail on the scope of this exemption was given. It is to be hoped that the reference to ‘unlisted and long-term non-bank debt financing’ will facilitate small businesses to raise debenture and other loan finance.

22/01/2014: HMRC to require self-certification of employee share schemes
www.hmrc.gov.uk/news/ers-admin.htm
Existing and new employee share schemes and arrangements must be self-certified and registered online from 6 April 2014. HMRC will not provide formal approval of these schemes from that date. The schemes and arrangements include Enterprise Management Incentives (EMI), Company Share Option Plans (CSOP), Save As You Earn option schemes (SAYE), Share Incentive Plans (SIP), and any non-tax advantaged arrangements. Failure to self-certify will mean the loss of tax advantages.

[Page updated: 08/12/2014]

 

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