TAX-EFFECTIVE BUSINESS INVESTMENT

HMRC has updated its recommendations for companies attempting to encourage investors to purchase stock in their company. If the company is correctly formed and qualifies under the Enterprise Investment Scheme (EIS) or the Seed EIS rules, the investors may be eligible for a variety of large tax breaks.

Under the EIS, the firm can raise up to £5 million each year, with a lifetime cap of £12 million raised. This includes funding from other venture capital programmed as well. The company must obtain venture capital investment within seven years after its first commercial sale.

The size of the issuing firm is crucial since the corporation and any qualifying subsidiaries must:

not have more than £15 million in gross assets before to the issuing of any shares, and not have more than £16 million in gross assets immediately following the issuance of any shares
The shares issued employ less than 250 full-time equivalent employees.

The investment must meet the “risk to capital” criterion, which means:

The cash must be utilized to help the firm grow and thrive.
The investment must represent a risk to the investors’ capital.
‘Growth and development indicate that the money will be utilized to boost the company’s revenue, customer base, or employee count.

There are a number of more complex scheme conditions that must be met in order for investors to get and keep EIS tax breaks on their shares. Tax credits will be withheld or withdrawn if the investors and the company do not follow the requirements for at least three years after the investment.

Before issuing the shares, it is best to obtain Advance Assurance from HMRC that the company is a ‘EIS qualified company.’

For further information, click to: Use the Enterprise Investment Scheme (EIS) to generate funds for your business – GOV.UK (www.gov.uk)

Seed EIS (SEIS) is intended to encourage investment in small start-up enterprises and, like EIS, provides a variety of tax benefits to those who acquire new shares in a company. The business must not have been in existence for more than two years when the SEIS shares are issued.

Seed EIS relief is only available for the first £150,000 of a company’s share capital. This can, however, be part of a larger share issue, with subsequent share offers eligible for EIS relief up to a yearly ceiling of £5 million.

Tax breaks, such as EIS, will be withheld or cancelled if the standards are not met for at least three years after the investment.

At the time the shares are issued, the firm must be an unquoted company that is involved in, or plans to participate in, a qualified transaction.

Another important need for Seed EIS qualifying is that the company and any of its subsidiaries must:

You must not have more than £200,000 in gross assets when the shares are issued.
Not be a relationship partner.
The firm must have fewer than 25 full-time equivalent employees when the shares are issued.

Before issuing EIS shares, it is best to get Advance Assurance from HMRC that the business is an eligible entity. More information is available at:

Use the Seed Enterprise Investment Scheme to fund your business – GOV.UK (www.gov.uk)

EIS Company Investors Get Tax Breaks
Investors who are not linked to the company can claim a 30% tax break on eligible EIS investments up to £1 million every tax year (or up to £2 million if at least £1 million is invested in knowledge-intensive firms). As a result, a £10,000 investment results in a £3,000 tax savings for the investor.

The connected person’s tests are challenging. Directors, for example, cannot claim EIS tax relief if they are a paid director of the company at the time the shares are issued, unless the payment is a ‘permitted payment.’ However, under the ‘business angel’ provision, they may be appointed as a paid director as a result of their investment.

If the shares are held for at least three years, the income tax reduction is retained, and any gain on disposal is exempt from capital gains tax.

Capital gains from the sale of any asset can also be postponed by reinvesting the proceeds in eligible EIS shares.

Investors in SEIS Companies Can Receive Tax Breaks
Investors who are not linked to the company can receive 50% income tax relief on their investment in qualified SEIS firms, up to £150,000 per tax year. As a result, a £10,000 investment results in a £5,000 tax savings for the investor.

The connected person standards are rigorous and equivalent to the EIS regulations; nonetheless, directors are eligible for SEIS tax benefit.

If the shares are held for at least three years, the income tax reduction is retained, and any gain on disposal is exempt from capital gains tax.

SEIS investors will also profit from the fact that they can deduct 50% of their investment from capital gains that year. Thus, a £10,000 investment allows the investor to deduct £5,000 from capital gains in addition to the £5,000 reduction in income tax liability that year.

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