If you are looking for an alternative to your current profession or simply wish to make the most of your money, how about becoming an investor, benefiting from tax relief and getting paid for your effort?
An Enterprise Investment Scheme (EIS) company is an unquoted company that carries out a ‘qualifying’ trade. Investment into such a company by an individual enables income tax relief of 20% of the investment made, up to a maximum of £500,000 invested; can be used to defer a capital gain of unlimited amount; and the shares potentially qualify for 100% inheritance tax relief after 2 years.
The Company
The Company must have a qualifying trade, for at least 4 months, which can include research and development. There is a list of trades that do not qualify, such as nursing homes, dealing in land or commodities, banking, leasing, property development farming, etc. The company must issue EIS 3 certificate for the investor’s tax relief to be claimed.
Investors
Some investors wish to ‘follow’ their investments and to be involved in some way with the company invested into and are investors who have a particular expertise to offer a business, and wish to be paid for their involvement.
A little known fact is that an investor can retain tax reliefs and receive an income from the company. This is usually in the form of director’s fees. Ideal for someone, for example, who invests redundancy money into the company who also needs a job; or a serial investor seeking paid directorships. Your expertise could be in finance, marketing or whatever, for (say) 2 days a week.
Connecting Rules
The general rule is that if an investor is connected with a company, then EIS tax reliefs could be lost or not available. You are ‘connected’ with the company if: you control the company; have more than 30% of the votes; your shares plus loan capital exceed 30% of the share capital plus loan capital; you trade in partnership with the company; you are an employee of the company; you are a director (unless exempted); you subscribe for shares as part of an arrangement where another buys shares where you are connected. See ITA 2007, ss 169-170 and VCM25080.
Exemptions
You are not treated as connected if: you are an unpaid director; your expenses as a director are reimbursed for performance as a director; you may have interest on funds loaned to the company; reasonable dividends; a reasonable rent for property let to the company; reasonable charges or remuneration for services (not secretarial or managerial) provided to the company. See ITA 2007, s 168(2), (3) and VCM25070. You must not have been a director prior to investing – otherwise you lose your tax reliefs.
Example
Tom invests £100,000 for 25% of the shares into Candid Marketing, a qualifying EIS company. He receives 20% income tax relief at £20,000. He provides marketing expertise 4 days a month for £2,000 per month to the company. Including his tax relief, he would have his initial investment returned in just over 3 years.
Practical Tip
Ensure you work with your money for tax relief and reasonable income. There are many investee companies that will do this kind of deal.
By Tony Granger
