Enterprise investment schemes can yield significant benefits to both qualifying companies and individuals that invest in them, despite proposed changes to tax legislation, according to mid-tier firm Smith & Williamson.
Adrian Walton, an associate partner at S&W, said trading companies can provisionally apply to the Inland Revenue to qualify as an EIS company, providing they are not already listed on a recognised stock exchange (excluding AIM).
Under EIS, shares bought in qualifying company can be sold at a later date without having to pay any capital gains tax.
However, recent proposals to make business assets taper relief available at 75% for shares invested in both a quoted and an unquoted company would result in an effective capital gains tax rate of just 10% – nullifying what is perceived as the main tax benefit of investing in an EIS scheme.
But Walton argues EIS is still an attractive option for unquoted trading companies to raise equity capital from individuals. He told AccountancyAge.com: ‘Many companies listing on the small cap AIM market use EIS as a route to attract equity capital’.
‘From a tax perspective we continue to advise our clients to invest in EIS companies where appropriate, despite the potentially reduced significance of the CGT exemption for disposals of EIS shares after 5 April 2002.’
This is because the scheme still offers a number of unique benefits. These include an income tax credit of 20% – subject to a maximum subscription per tax year of Pounds 150,000 and the ability to defer capital gains tax at up to 40% on the disposal of any chargeable asset without monetary limit together with the initial income tax credit.
Walton said: ‘From a tax perspective we continue to advise our clients to invest in EIS companies where appropriate, despite the potentially reduced significance of the CGT exemption for disposals of EIS shares after 5 April 2002.’
But he warned that investors should take note that any capital gain earned while shares are held in an EIS company would result in ‘crystallisation’ of this gain. These include ‘innocent commercial transactions’ such as company buying back its own shares or the repayment of a loan.
‘This can dramatically and adversely affect the EIS investor’s tax position,’ said Walton.
Links
More information on EIS from the Inland Revenue