The Enterprise Investment Scheme (EIS) is a HMRC tax incentive program built to incentivise investment into innovative companies that would otherwise pose a high risk to investors. EIS provides investors with generous tax relief for their investments into qualifying companies. The tax benefits include:
- Income Tax Relief
- Capital Gains Tax Deferral
- Capital Gains Tax Exemption
- Loss Relief.
Put simply, EIS rewards people with tax breaks for investing in startups. These reliefs—and obtaining advance assurance that your investors can get them—can be the tipping point for sealing the deal with a potential investor.
There are a number of factors that determine whether a particular investment qualifies for EIS tax relief (check out our overview of all the factors here). Most of these factors relate to the company itself, but there’s one caveat in relation to the investor: the investor must not be connected to the company. “Connection” can mean:
- Control in the company
- Holding more than 30% of the share capital or voting rights, or
- Being a partner, director, or employee of the company.
In this post, we’re looking at an exception to that third bullet:
The Business Angel Exemption allows new directors (i.e. directors who weren’t involved with the business before they invested) to become a director without losing their EIS tax-exempt status. As long as the appointment as director occurs after the shares have been issued, the Business Angel Exemption creates the ultimate win-win for both startups and investors.
Why is the Business Angel Exemption important? It means investors don’t have to choose between advising the company as a director and helping their personal bottom line when tax season comes around. Without it, any investor who wanted to get involved with the business as a director would be out of luck—but with it, an investor can become a director, help the company (and therefore their investment) succeed, and still get those awesome EIS tax breaks.
So, how can you put this knowledge to land a financial investment and an involved director eager to contribute their experience and business acumen?
- Determine whether your company meets all the requirements for EIS relief. We’ve put together a handy checklist of EIS and SEIS (the Seed Enterprise Investment Scheme) requirements here.
- Apply for an Advance Assurance so you can tell investors without a shred of doubt that their investment will qualify for favorable tax relief.
- Create a knockout investment pitch that includes EIS tax relief figures and information about how investors can still get involved under the Business Angel Exemption.
Don’t want to navigate a cumbersome HMRC application process? Let Linkilaw do it for you! Our panel of lawyers can prepare your Advance Assurance application and all the necessary documentation to attract potential investors. Book a legal session with one of our consultants for more information.