Qualifying for the conditions and obtaining the income tax relief is unfortunately not the end of it! Included on your EIS3 certificate you will find the termination date, confirming the end of the three year period where the income tax relief obtained and capital gains tax exempt status could be lost.
There are a number of disqualifying events which could be triggered by either the company or the investor. This is not a complete list but here are some of the common events which could result in a withdrawal of the shares qualifying status.
- Disposes of the shares, other than to a spouse or civil partner.
- Becomes connected (30% test) with the company.
- Is appointed a director or employee of the company. There is an exception for ‘business angel’ investors who have not been involved with the business at the time of the share issue, but are subsequently appointed as a paid director, providing the remuneration is reasonable.
- Receives value from the company or a person connected with the company, this could include but not limited to:
- release or waiver of a loan made to the investor;
- the company undertakes to discharge the investor’s liabilities to a third party;
- provision of a benefit ;
- repayment/redemption of the investor’s EIS/non-EIS share capital;
- payments made to the investor for giving up rights over shares;
- excessive dividends;
- buying a company asset at under market value;
- selling an asset to the company for more than market value.
- Purchases some of its share capital from a non-EIS member;
- Acquires a 50%+ interest in a company which carries on a trade which is excluded under the EIS provisions;
- Purchases either the share capital of another company or the trade and assets of another business with which the investor is connected.
- Does not employ the EIS money raised in the trade within 2 years.
- Uses the EIS money to acquire a trade previously carried on by another person or the assets used in such a trade;
- Starts to carry on excluded activities to such an extent that it represents more than 20% of the company’s business activities.
HMRC must be informed within 60 days following a disqualifying event.
Whilst this article has focused upon EIS, SEIS has a similar list. What is clear, when considering whether to introduce external investors through venture capital schemes, the share issue is not the end of your duties as directors.