FAQ - Frequently Asked Questions
An EIS is an investment vehicle established on January 1st 1994 as a successor to the Business Expansion Scheme (BES) following the UK Governments’ initiative to assist small UK based entrepreneurial companies gain funding. The funds raise capital by offering a series of attractive tax relief and deferral options for private investors. The tax incentives are intended to help bridge that gap by encouraging investment in young, growing companies which inherently are potentially risky enterprises, because of their size. It is this risk profile that the Government recognises and hence the generous tax benefits for the investors. It raises money from investors and then invests (buys shares) in these small entrepreneurial companies, which normally are privately owned, with only one or a few investors. Such small enterprises often find difficulty accessing capital because of the lack of capital available to them.
Different from the collective structure of VCTs, the new legislation allowed for EIS Funds to be created. The creation of the EIS Funds has played significant role in providing venture capital for small business – according to recent figures; the scheme has raised £6.1bn and invested in over 14,000 companies.
A discretionary series of investments run by an authorised fund manager and investing in shares qualifying for EIS tax reliefs. They are aimed normally at high net worth or experienced investors with current income and/or large capital gains to shelter. Investors’ receive tax relief at point of investment by the fund manager in stocks. Individually each investment in an EIS company offers the potential of high growth, but should be regarded as having significant risk and longer term in nature.
Qualifying companies are smaller (maximum gross assets of £7 million and less than 50 employees) usually unquoted UK trading companies, although AIM listed companies are eligible, if they meet the requirements.
The Highgate Tech Fund aims to complete 4 to 7 investments over a period of one to two years into EIS qualifying companies. Diversification can mitigate the higher risks associated with investing into emerging technology companies. Highgate Tech Fund intends to achieve this by investing successfully across a wide range of technology based businesses.
The minimum investment into the Fund is £10,000. The maximum investment amount is unlimited. All investments are governed by the terms of the Fund. However, the maximum amount of EIS qualifying investments on which you can claim income tax relief in any tax year is £1,000,000. This can be claimed in the tax year the investments were made (which is intended to be 2012/13) or carried back to 2011/12. If you made no EIS qualifying investments in the tax year 2011/12, you can invest up to £1 million in EIS Qualifying Investments in 2012/13, claim income tax relief on up to £1,000,000 in that tax year and carry back a maximum of £1,000,000 to the previous tax year. There is no maximum amount on which CGT deferral relief and IHT relief can be claimed.
EIS is appropriate for those experienced investors or high net worth individuals who wish to include in their portfolio some smaller companies, which carry significant risk, but opportunities for high returns.
You are the beneficial owner of shares in each company in which the Fund invests. Your investment in the shares of these companies shall be in proportion to your investment in the Fund subject only to any rounding that may occur to avoid issuing fractions of shares. However, to allow efficient administration, the shares will be registered in the name of the nominee company who will hold them on your behalf as your nominee, subject always to HM Revenue & Customs rules for ownership from time to time.
Generous tax reliefs currently available include inheritance tax relief (after two years), capital gains tax deferral relief and current and look back for 2 years income tax relief (minimum holding period of three years for the investments). The tax reliefs are subject to change and various conditions and potential investors are advised to take appropriate financial advice before considering an investment. Below is a summary of the current provisions:
- 30% Income tax relief on new ordinary shares up to £1,000,000 per tax year. Shares must be held for three years. Relief is against the tax liability in the year the shares are issued but can be carried to the previous year for shares
- Exemption from capital gains tax for any gains made on EIS qualifying shares held for three years or more
- Loss relief against income or capital gains for losses made on disposing of qualifying EIS shares after three years unlimited capital gains tax deferral
- CGT on gains can be deferred if the EIS share subscription is made within one year before or three years after the date of disposal which gave rise to the gain. Only £1,000,000 of investment per tax year qualifies for income tax relief and exemption from CGT on disposal
- Inheritance tax relief after two years
- liquidation of the investments is usually via merger, sale, flotation or liquidation
- Qualifying companies must have gross assets of no more than £7 million immediately before investment and no more than £8 million after the investment
- Since 6 April 2004, VCTs no longer provide CGT deferral. Hence, EIS is, for most investors, the only means of deferring capital gains tax liabilities
The rules governing the EIS are complex and interrelated with other legislation so it is nearly always essential to consult a professional who is experienced in this area. Many firms do not have this expertise and accordingly they may not recommend you investing, via the EIS route. If in any doubt, please do consult a professionally qualified adviser.
EISA are recognised by the Treasury and HMRC as the official trade body for the EIS industry and enjoy a positive and communicative relationship with both government bodies. EISA is an independent, not-for-profit organisation, the aim of which is to further the availability of capital and resource to small to medium-sized enterprises through the EIS. Primarily, its aims are twofold: firstly to work with the Treasury and HM Revenue & Customs to improve the user-friendliness and success of the EIS, and secondly to promote the benefits of the Scheme across a wide range of parties covering investors, their personal and taxation advisers and financial intermediaries; companies seeking EIS investment, and their accountancy, taxation, legal and corporate finance advisers, as well as sponsors, promoters, market commentators and analysts. Highgate Tech Fund is a member of the EISA.
EIS relief is claimed on an investment-by-investment basis. We provide our investors with the necessary EIS certificates obtained from the HMRC by our portfolio companies. These certificates enable investors to claim income tax relief and capital gains tax deferral from HMRC.
You cannot claim relief until you receive the necessary form EIS3, which we will provide to you. Your claim can be made on the Self Assessment (SA) return for the tax year in which the shares were issued or the previous income tax year. You do not have to wait until the entire Fund is invested before you claim tax reliefs. If the tax return has already been submitted, a standalone claim can be made via the EIS form. Claims to relief can be made up to five years after the first 31 January following the tax year in which the investment was made. EIS3 forms can be used to claim both income tax and capital gains tax deferral relief by sending them to your tax office.
Is there a limit for capital gains tax deferral relief, on EIS investments, and when does this relief have to be claimed?
There are no minimum or maximum amounts for deferral. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.
Investments in the Fund cannot be jointly owned, but each spouse can make a separate investment, and each can receive income tax relief on the first £1,000,000 per tax year.
Please complete the application form at the end of the Information Memorandum. Your cheque should be made payable to the Fund's agents: Woodside Corporate Services Ltd. The cheque, along with your application form, should be sent to: Enterprise Private Equity Ltd, Apsley House, 176 Upper Richmond Road, London, SW15 2SH
We will acknowledge receipt of your application by return post. Once your cheque has been cleared, your money will be held in escrow by our legal counsel, ready to make the first investments once the Fund has closed.
You will be included in the approximately 4-7 investments which take place after the date of your subscription. We anticipate that it will take approximately 12 months to make all investments from your portfolio, but we are required to make all investments within 24 months of the final closing of the fund.
During this time your money is held in a segregated escrow account in your name by our legal counsel and accrues interest at wholesale rates which is credited to your account.
A formal report will be sent to you every six months. You will also receive a letter about each new investment. And you can call us at any time for an informal overview and discuss the progress of the Fund.
You may give notice to withdraw money at any time. However, your investments in unquoted companies are not readily marketable and the timing of any realisation or returns cannot be predicted. As such, you should be prepared to retain these investments until the Fund exits from them. There are also potential tax consequences of withdrawing money. If the three-year holding period for an individual investment that is sold has not been completed, the income tax relief received in respect of that investment will have to be repaid and (if applicable), a portion of the deferred capital gains liability will become payable once again. The money withdrawn will also not be exempt from inheritance tax.
In the event of the death of an investor we will return any un-invested cash to the Executors, upon request. Normal practice is to transfer any holdings into the names of the Executors or the beneficiaries of the will, but the shares will still be held by the nominee Upon the liquidation of the investment the proceeds will go to the named shareholders. Investments held for a minimum of two years are, under current legislation, exempt from Inheritance Tax.
The key dates are as follows:
Income Tax Relief: based on the date of the underlying investments in Qualifying Companies
Capital Gains Tax Exemption: any capital gains on investments made by the Fund on your behalf will be exempt from capital gains provided they have been held for three years or for three years from the date they commenced trading, if later, and income tax relief has been obtained and not withdrawn
CGT Deferral Relief: you can go back three years or forward one year from the dates the Fund invests in Qualifying Companies to claim deferral relief on other capital gains provided an amount equivalent to those gains is invested in Qualifying Companies by the Fund
Inheritance Tax (IHT) Relief: an investment in a qualifying EIS company is normally treated as “relevant business property” for the purposes of IHT when the shares are held for at least two years. In this case, an IHT exemption for 100% of the value of an EIS investment will be obtained in the event of the death of an investor. Under current legislation, inheritance tax relief would be lost if the company’s shares were listed on the main market of the London Stock Exchange or certain overseas stock markets (Even if shares are sold provided that the qualifying shares have been held for at least two years out of the last five and a replacement qualifying asset is held at the time of death, IHT relief should apply.)
There is no maximum amount on which CGT deferral relief and IHT relief can be claimed.