Tax relief for family members
NW writes: I am starting a small business and am interested in using the Enterprise Investment Scheme (EIS) to issue equity. My understanding is that while family members are not eligible to use the EIS to reap most of the benefits, they are still able to benefit from the loss mitigation aspect of it. For example, I would like to issue equity to my husband through the EIS. My understanding is that while he would not benefit from the upside that EIS provides, he would have a portion of any loss “insured” so to speak. Is this correct?
The EIS is designed as a tax efficient way for small unquoted trading companies to raise finance by encouraging individuals to subscribe for shares, writes Jon Sutcliffe, partner at Kingston Smith LLP. However, individuals that are “connected” with an EIS company will not be eligible to receive income tax relief on the subscription price of their shares or enjoy a tax-free capital gain on a future sale.
Broadly speaking, individuals (including spouse and relatives) that are either employees of an EIS company and/or hold more than 30% of the shares will be deemed to be connected. Therefore, should the aggregate of your combined share capital exceed 30% of the company, your husband will not enjoy the benefits available to an unconnected EIS investor.
Shareholders are still able to benefit from loss relief on the disposal of subscription shares in a qualifying trading company where the conditions are met regardless of whether EIS is used. On realising a loss on a disposal, it is possible to elect for that loss to be offset against the income for that year and/or the previous year, rather than capital gains.