A friend wants you to invest in his company and be a director. He says as an incentive you can claim enterprise investment scheme (EIS) tax relief. Usually directors are excluded from this, so what do you need to do to qualify?
Raising finance
The long running enterprise investment scheme (EIS) offers generous tax incentives to encourage you to invest in relatively young, small to medium-sized companies. The main incentive is a credit against your general tax bill equal to 30% of your investment. However, the rules contain restrictions to prevent those already connected with a company, e.g. a director, benefiting from the tax breaks.
Qualifying share capital
To qualify for EIS relief you must subscribe for shares, that is purchase them direct from the company rather than from another person or business. The company must carry on a trade which isn’t excluded by the rules.
Other blocks and restrictions
During two years before the issue of EIS shares and the later of three years after the investment was made and the date the company commences trading, you must not be connected with the company or EIS relief will be lost. Connected for EIS purposes means being a paid employee or director, but you can be an unpaid director. Neither must you directly or indirectly own or be entitled to acquire more than:
- 30% of the company’s (or one or more of its subsidiary’s) ordinary share capital; or
- 30% of its voting rights; or
- the rights to 30% of its assets if it were wound up.
There’s a common misunderstanding that the restrictions mean that directors can never qualify for EIS relief. In view of the blocks and restrictions mentioned above it’s easy to come to that conclusion. However, investors can be directors and qualify for EIS.
Exclusions from restrictions
As a general rule, you should only become a director after you have been issued with the EIS shares. Also, your shareholding, or yours and an associate, e.g. your spouse, together, must not at any time exceed the 30% limits mentioned above.
Tip. If you want a larger financial stake in the company than the 30% of ordinary share capital etc. allowed, the company can issue you with a different class of shares instead, e.g. non-voting preference shares.
Tip. If you meet the general conditions, EIS relief is allowed if you’re an unpaid director, or are paid only to cover expenses you incur in attending company meetings or on company business.
Tip. You can provide professional and other services to the company on a self-employed basis and receive payment for these without jeopardising EIS relief.
Tip. If you are a business angel you can be a paid director as long as your remuneration is reasonable for your role in the company.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.