EIS Tax Relief for Joint Investment
The following scenario often arises with our client Mr Investor, who is considering investing in an early-stage business. Wonderful Ltd is an established FinTech company which has developed a track record of an established user base, consistent revenue figures and other key performance indicators. Wonderful Ltd is now seeking to raise Series A funding of £1.5 million in order to further optimize its user base and product offerings. Mr Investor has received an Investment Memorandum for the funding round and is considering allocating a small proportion of his investment portfolio. Mr Investor has asked his accountant to run through the Investment Memorandum with him and has identified five reasons why he wishes to invest. Being an early-stage business, Mr Investor acknowledges that the investment is inherently high-risk, but he really believes in the founder Mrs Wonderful, who attended the same university. The generous Enterprise Investment Scheme (EIS) tax breaks “cushion” the risk element of the investment (see below) but nonetheless, the minimum investment of £75,000 is punchy for Mr Investor.
Mr Investor has an idea. Can he pool together capital from two other friends in order to meet the £75,000 minimum investment? Will each investor still be eligible for the EIS tax relief for joint investment?
Joint Investment – A Problem Shared is a Problem Halved
In short, there is a way to pool funds in order to meet one investment clip of £75k. EIS relief is available for an individual who makes the subscription on his or her own behalf, with two notable exceptions:
- Individuals who use another person as a nominee to subscribe for the shares, or be registered as the holder of them, on their behalf, are treated as themselves being the subscriber.
- Individuals who invest jointly with others, with the result that the subscribers are in law acting as bare trustees (whether for themselves or for others), are themselves as individual beneficiaries treated as being the subscribers.
Mr Investor can therefore form a bare trust with his friends (as in point 2) in order to make a direct investment jointly. Where shares are issued to a bare trust on behalf of a number of beneficiaries, each beneficiary is treated as having subscribed, as an individual, for the total number of shares issued to the bare trustees divided by the number of beneficiaries. This creates an important limitation in that each of the three friends should invest an equal percentage in Wonderful Ltd.
Paperwork
Wonderful Ltd should provide each subscriber form EIS3 showing the total number of shares subscribed for on Page 1 of the form. Form EIS3 Page 3 should show the amount on which each owner is entitled to claim the tax relief for the shares, that is the fractional amount of the total subscribed.
Tax Relief?
Whilst joint investment does not preclude EIS tax relief, Mr Investor and his associates must of course check that all the other EIS eligibility criteria are met for EIS tax relief to apply. Mouktaris & Co can provide a checklist of questions to ask in order to determine whether tax relief under EIS is available to an investor in shares. The target company may produce an Advance Assurance document to potential investors demonstrating that HMRC accepts the investment under the scheme, however Advance Assurance will not tell you if an investor would meet the conditions of the scheme.
EIS Investment Funds
A different route (via point 1 above) would be for Mr Investor to invest via an EIS investment fund, which is structured as a nominee vehicle which invests funds in EIS-qualifying companies on behalf of investors. This vehicle would provide Mr Investor with a more diversified risk exposure to early-stage businesses, as his £25,000 investment would be spread across a number of target companies identified by the fund manager. Wonderful Ltd may seek to market its strengths to the EIS investment fund manager so as to be included in the fund’s equity holdings. So in fact Mr Investor could in the future invest in Wonderful Ltd through an EIS investment fund without necessarily being reliant on his friends’ capital.
EIS for Investors: Advantages
- As a reminder, EIS investors receive the following benefits as a result of participating in the scheme:
- A 30% income tax break against the amount invested
- No capital gains tax (CGT) to be paid on any profit arising from the sale of the shares, as long as they are held for at least 3 years
- Payment of CGT can be “rolled over” if the money gained is invested through EIS. The investment must be made 1 year before or 3 years after the gain occurred
- No inheritance tax is payable provided shares are held for at least 2 years
- If the shares are sold at a loss, the loss can be offset against any income tax in that year or the previous year
Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.