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About EIS

The Enterprise Investment Scheme (EIS) assists early-stage companies in raising equity finance by providing tax reliefs to investors. To obtain the tax reliefs described, it is necessary to subscribe for new shares in EIS qualifying companies and claim the relief. The tax reliefs will only be relevant to investors who pay UK income tax and/or wish to defer a capital gain.

EIS – What you need to know

The following headings provide further detail on the benefits of EIS investing, direct investing or investing via a fund, approved or unapproved funds and breaking down some of the barriers in regard to what offers are available to the investor seeking tax-efficient investment structures.

If you are interested in investing in an EIS scheme then please download our IM.

In summary, tax-efficient benefits for the EIS investor considering Mercia EIS Funds include:

  • Income Tax relief
    30% Income Tax relief against Income Tax paid or payable in relation to the current tax year on total investments up to £1,000,000 per investor. Alternatively an investor can opt to treat an investment as having been made in the previous tax year, in whole or in part, such that 30% tax relief is available against income tax paid or payable for that year.
  • Capital Gains Tax deferral
    CGT deferral on unlimited gains invested in qualifying companies, in respect of gains that arise within three years before and 12 months after the date of investment.

  • Tax free capital gains
    There is no CGT liability on gains on the disposal of shares which have been held for at least three years in EIS qualifying companies or, if longer, three years after the company commenced its trade.
  • 100% Inheritance Tax exemption
    Through the availability of BPR, there may be 100% IHT exemption on the death of the investor (or on certain lifetime transfers) for each individual investment that has been held for at least two years.
  • Loss relief
    Loss relief (providing total tax relief of up to 61.5%). A loss on any qualifying investment in the portfolio, irrespective of the overall performance of the portfolio, can be offset by individuals against income of the tax year of the loss, or the previous tax year, or against capital gains (including against the tax liability that arises on the revival of any deferred gain) of the tax year of the loss and future years.

Types of EIS schemes available

If investing in a fund, what type do investors select: HMRC approved or HMRC unapproved, capital preservation or capital growth?

HMRC approved or HMRC unapproved EIS Funds

The only difference between an 'approved' and an 'unapproved' fund is that provided the approved fund invests at least 90% of its assets in at least four EIS compliant investments within the 12 months following fund closing, then investors in the fund will be treated as having made the EIS investments as at the date the fund closes and not, as is the case with an unapproved fund, when the fund actually invests in the EIS investments. Approved Funds were more popular when the carry back provisions were more restrictive, for this reason.

The majority of EIS funds are actually 'unapproved'. If the investment is made in an unapproved fund Income Tax relief is available following each investment by the manager. If one assumes the manager takes up to two years to invest the fund and manages the timing of investment so that the fund is deployed equally over the two years, Income Tax relief is available across two tax years, all of which are at 30% (as currently legislated). There is therefore greater flexibility in regard to Income Tax relief.

The final consideration is the fact that as 90% of the capital must be invested within 12 months in an 'approved fund', investors should be sure that the fund in question has identified its dealflow as private investments take a lot of due diligence and time, and the 12-month clock is ticking.

EIS schemes – tax-efficient investment with substantial downside protection

EIS investing is a highly tax-efficient vehicle for investing with substantial downside protection in the form of loss relief. If you are interested in investing in an EIS scheme, please contact our Investor Relations Team today or download the Investment Memorandum.

Capital preservation or capital growth

Two types of EIS funds exist: capital preservation and capital growth.

  1. Capital preservation
    Often asset-backed in some manner, these EIS funds have modest returns but the risk of capital loss is expected to be low. Over the last few years, HMRC has progressively diminished the use of tax benefits for investors with a second subsidy as well as investors who are hoping to reduce risk by owning physical assets that could be sold to reduce the impact of any losses.
  2. Capital growth
    Capital growth EIS is where the fund manager is hoping to receive capital gain on their investment typically over a four to seven year period, whilst benefiting from: Income Tax reliefs on their investment in the short term; tax-free capital gains and IHT relief in the medium to long term and; substantial loss relief should their investment fail. The perceived risk of such investment structures is higher, therefore the investor needs to know that they will benefit from a diversified portfolio.

Important information

Note: Shares must be held for at least three years to receive most EIS benefits summarised above and readers are directed to http://www.hmrc.gov.uk/eis/ for full details on EIS investing. Your attention is drawn to the fact that this article does not constitute a personal recommendation. Mercia Fund Management Limited (MFM) is not authorised to provide specific and personal advice on the suitability of investments for a potential investor's individual circumstances, risk tolerance or investment objectives. If you have any doubt about whether an investment in a fund such as an EIS Fund is appropriate you should consult a suitably qualified financial adviser. MFM is authorised and regulated by the Financial Conduct Authority in the conduct of its Investment Business.

Additional information

Tax certificates

In order to claim Income Tax relief and/or Deferral Relief, you will need an EIS3 tax certificate for each underlying investment within the fund. After each investment into an investee company, Mercia will work with the company in order to apply to HMRC for the EIS3 tax certificates for each investment. Provided that the company has been trading for four months, the EIS3 tax certificates are typically sent out within 50 days of each underlying investment.

Claiming tax reliefs

Income Tax relief is applicable on the dates on which individual investments are made into each investee company, rather that the date you subscribed into the fund. The latest date that an investor can file a claim for Income Tax relief or Deferral Relief is five years after 31st January following the tax year to which the claim relates. Mercia is one of the leading technology investors focused on raising and investing Enterprise Investment Scheme (EIS) Funds. Our teams work closely with innovative UK businesses, providing both financial support and significant operational expertise, to help accelerate growth using Mercia's EIS Funds, known as Mercia EIS Funds. In addition to the capital growth targeted for Mercia's EIS Funds, the tax advantages from such investments can be considerable; to include Income Tax relief, IHT relief, loss relief, CGT exemption on exit, and exemption or deferral of capital gains realised on sales of other assets. The primary tax advantages available to investors in the Mercia EIS Fund series are EIS (and where relevant SEIS) tax relief, whereby fund returns can be substantially enhanced subject to the personal circumstances of each investor. Please follow the page links for further information on these reliefs along with case examples of how they could be applied.

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