Eligible shares are any new ordinary shares issued in the Enterprise Investment Scheme company for bona fide commercial reasons, which, throughout the period of three years beginning with the date on which they are issued, carry no preferential rights to dividends or assets on liquidation of the company. The shares must be fully paid up at the time of issue and they cannot be redeemable.
A qualifying company need not be resident in the UK for tax purposes but it must be unquoted and the funds raised must be used by the issuing company or by a qualifying 90% subsidiary in carrying out qualifying activities. Where a parent company is raising funds, it must only have 51% subsidiaries to be a qualifying company, with the exception of property management subsidiaries which must be held 90%. However, the funds can only be used by qualifying 90% subsidiaries.
Broadly speaking, the business activity for which the money is being raised should be conducting a qualifying trade wholly or mainly in the UK during the three years from when the shares are issued or, if later, three years from when the company commences to trade. Research and development undertaken with the intention of starting a trade is also treated as a qualifying business activity.
There is a ‚Äú20% tax relief‚ÄĚ rule that takes the form of a credit against an individual‚Äôs personal tax liability. It is given at 20% of the sum invested subject to there being sufficient tax liability to absorb the relief. Thus the maximum tax credit available to an individual is ¬£80,000 in each tax year (¬£100,000 when the investment limit is increased to ¬£500,000).
For shares issued between 6 April and 5 October up to half of the investment, subject to an overall maximum of ¬£50,000 (¬£25,000 prior to 6 April 2006), can be treated as being made in the previous tax year.
If a qualifying individual holds eligible shares for more than three years from the date of issue (or from the date of commencement of trading, if later), then any capital gain on the disposal of the EIS shares after that period will be tax‚Äďfree, subject to any withdrawal of the relief as mentioned below. Further, if a loss arises on the disposal of EIS shares then, subject to adjusting for the income tax relief previously claimed, that loss will be available to the investor. This relief can either be claimed as a capital loss or as a loss for income tax purposes.