Transcript IMIL Divisional 26 April 2012

St. James’s Place Wealth Management
EIS and VCT “Back to Basics” Workshop
For Professional Advisers only, not to be distributed to Retail Clients
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Agenda
1. Introduction to Ingenious
2. Background to the Venture Capital Initiatives
3. The tax reliefs associated with EIS
4. How, where and why these reliefs have been enhanced by the Government
5. The tax reliefs associated with VCT
6. Administration and EIS timetable
7. Why invest in an EIS or VCT:
 Income Tax relief
 Capital Gains Tax deferral and Capital Losses
 Inheritance Tax Planning
 Rolling EIS Investment programme
 UK resident, Non Domiciled Individuals
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Introduction to Ingenious
• Founded in 1998
• Ingenious is a market leading independent financial services group providing investment and advisory expertise
• Clients include institutions, corporates, family offices, high net worth individuals and retail investors
• Our activities focus on the media and entertainment, sport and leisure, and clean energy sectors, operating a
number of specialist funds with in excess of £7 billion raised and invested
• UK’s largest independent investor in the creative economy
• The Group has delivered sustainable and substantial profits each and every year since formation regularly featuring
in The Sunday Times Top Track list of growth companies
• Strong balance sheet and no debt
• One of the UK’s leading alternative asset managers and a specialist in EIS offerings
• Over £450m raised from EIS investors since 2005 invested into more than 241 EIS companies
• 89 EIS companies successfully exited with actual returns in line with those targeted
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Group Structure
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Background to the Venture Capital Initiatives
• EIS, VCTs and SEIS are Government sponsored initiatives designed to encourage investment in small, unquoted
trading companies
• The aim of the schemes is to help close the “equity gap”, whereby small businesses often find it difficult to raise
large amounts of capital
• The schemes offer investors a wide range of tax reliefs to help provide downside protection against what are often
higher risk investments
• The Enterprise Investment Scheme (EIS) was introduced in 1993
• The Venture Capital Trust (VCT) was introduced in 1995
• The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012
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The tax reliefs associated with EIS?
Income Tax Relief
• Reduction in income tax liability amounting to 30% of the total investment up to a maximum of £1,000,000
• Income tax relief on investments of up to £1,000,000 can also be carried back to the previous tax year (2012/13)
• Relief cannot exceed an amount which reduces the investor’s income tax liability to nil
CGT Disposal Relief
• Any gain on the disposal of EIS shares after three years and on for which EIS income tax relief has been given and
not withdrawn, will be exempt from CGT
CGT Deferral Relief
• To the extent to which a UK resident investor generates a chargeable gain, he/she can claim to defer paying CGT
on all or part of that chargeable gain by investing in qualifying EIS shares
• No limit on the amount of chargeable gains which may be deferred in this way
• Applies to any chargeable gains arising three calendar years prior to the qualifying EIS investment or one year after
the issue of qualifying EIS shares
• Gains are deferred until there is a chargeable event such as a disposal of the EIS shares or an earlier breach of the
EIS rules
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The tax reliefs associated with EIS
Inheritance Tax Relief
• EIS shares should constitute “relevant business property” for inheritance tax purposes
• Once shares have been held for a period of two years, they should qualify for 100% business property relief (BPR)
and will fall outside the investor’s estate
Loss Relief
• Tax relief is available for any loss realised on the disposal of qualifying shares on which EIS income tax relief has
been obtained
• The loss (net of any income tax relief initially obtained) may be set against the individuals taxable income arising in
the tax year in which the disposal occurs, or the previous tax year
• Alternatively, the loss may be offset against capital gains in the tax year of disposal
• Any excess losses may be carried forward for relief against future capital gains
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The Enterprise Investment Scheme – Summary of Rules
• The Enterprise Investment Scheme (EIS) is a Government incentive to help smaller entrepreneurial trading
companies raise
 The company must have fewer than 250 employees
 The maximum annual amount that can be invested in a single company is £5m
 The annual amount that an individual can invest is £1m
 The Gross assets of the company must not exceed £15m immediately before any share issue
and £16m immediately after that issue
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The tax reliefs associated with VCT
Income Tax Relief
• Reduction in income tax liability amounting to 30% of the total investment up to a maximum of £200,000 in any tax
year
• Applies to new ordinary shares only
• No carry-back facility
• Relief cannot exceed an amount which reduces the investors income tax liability to nil
Dividend Relief
• VCT dividends are exempt from income tax
• Applies to both new and second-hand shares
• VCT distributions can be paid from capital
CGT Disposal Relief
• Any gain on the disposal of VCT shares after five years and on which VCT income tax relief has been given and
not withdrawn, will be exempt from CGT
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Administration
EIS – note EIS 3
• Companies that are hoping to raise funds under EIS are encouraged to seek advance assurance from HMRC, prior
to inviting applications for shares
• Although the procedure is not statutory, HMRC is usually bound by an assurance given, provided that the
information supplied was correct and complete at the time it was given and the circumstances remain the same as
those described in the advance assurance applications.
• Once the company has been trading for four months, an EIS1 form is submitted to HMRC, providing details of the
investors and the shares issued
• HMRC will then authorise the company on a form EIS2, to issue certificates (on form EIS3) to the investors
• HMRC will send the company a number of blank forms EIS3 “EIS Certificates” – which the company then
completes and provides to the investors
• Investors can then claim tax relief via their tax return or a stand alone claim
VCT
• Companies must apply to HMRC for VCT approval
• In practice, VCTs issue income tax relief certificates as a matter of routine along with share certificates
• Investors can claim tax relief via their tax return or a stand alone claim
• Investors who receive exempt dividends are not required to show them on their tax returns
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Example EIS Timetable
Months
Submit application
and Investment
0
1
Commencement
of EIS trade (start
of production on
1st TV show)
Shares
allotted
2
Ingenious applies to
HMRC for your EIS3
certificate (4 months
after
commencement of
trade)
3
4
5
6
7
8
9
10
11
Receive EIS3
certificate
Either claim 30% income tax relief on
tax return or through adjustment to
PAYE coding
12
Every year you
will receive:
1. Annual
Report &
Financial
Statements
2. Production
update
3. Notice of
AGM
Note: This timetable is indicative only; the timing of receipt of EIS 3 certificates will vary for each EIS company depending on time required to allot shares and the
production timetable for the company’s first programme.
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Why invest in an EIS or VCT?
They are a viable alternative investment in a climate of low interest rates, equity volatility, concerns about
inflation, and a reduction in tax relief for pensions, many advisers are now considering the relative advantages of
EIS or VCT investments for their clients.
1. Income Tax relief
2. Capital Gains Tax deferral
3. Inheritance Tax Planning
4. Rolling EIS Investment programme
5. UK resident, Non Domiciled Individuals
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1. Income Tax Relief
Case study - 45 year old executive, £180,000 income, with an element of liquidity and looking for medium term
returns with a desire to broaden his range of alternative investments
£30,000 taxed at 45%
£117,990 taxed at 40%
£32,010 taxed at 20%
Taxable Income = £180,000
£13,500
•
Invest £100,000
•
Claim income tax credit of £30,000 (i.e. 30%
of £100,000)
•
Tax bill reduced from £67,098 to £37,098
£47,196
£6,402
Tax Payable = £67,098
Note: Personal Allowance irrelevant at this level of income
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2. Capital Gains Tax Deferral
Case study - 78 year old client has made a capital gain of £100,000 in the 2011/12 tax year. He has already paid his
CGT bill of £28,000 in January 2013.
So why Invest in an EIS?
• It is a viable alternative investment in a climate of low interest rates and equity volatility
• By making an EIS investment in the 2013/14 tax year of £100,000 the client can elect to defer the 2011/12 gain
• The £28,000 CGT that he has already paid is refunded by HMRC.
• The gain is deferred until the EIS shares are subsequently disposed of BUT in the event of death whilst holding the
EIS shares, the gain will never come into charge.
Result:
• The client has enjoyed a £30,000 income tax credit in 2013/14
• He has deferred a capital gain of £100,000 and received £28,000 back from HMRC
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2. Capital Gains Tax Deferral
Purchased
property in
2000
£250,000
Sold
property in
2011/12
Capital
Gain
Paid Capital
Gains Tax
(CGT)
Invest in
EIS 2012/13
CGT Credit
£350,000
£100,000
£28,000
£100,000
£28,000
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Deferred for
the life of
EIS
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3. Inheritance Tax Planning
Business Property Relief
EIS investments qualify for Business Property Relief (BPR) after two years and will therefore be considered outside of
the estate for Inheritance Tax (IHT) purposes.
Replacement Business Property
Clients selling an asset which already qualifies for BPR, may be able to benefit from BPR immediately on making an
EIS investment
However: While EIS investments are a viable alternative investment when considering estate planning for a particular
client, it is worth noting that the shares allotted are illiquid and will be tied up in the EIS until such time that the EIS
companies look to return the capital to its shareholders.
If this is a concern to a client, then there are stand alone BPR qualifying investments, which don’t share the same
advantages as an EIS with regards to tax reliefs, but they do allow an estate to liquidate assets in a more timely
fashion than an EIS
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4. Rolling EIS Investments
Year 5 you can use the capital returned from Year 1 investment to make a
further EIS investment and gain another 30% tax credit.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
EIS
Investment
£100,000
£100,000
£100,000
£100,000
£100,000
£100,000
30% Tax
Credit
£30,000
£30,000
£30,000
£30,000
£30,000
£30,000
Use the 30% tax credit for cashflow purposes e.g. school fees
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5. UK Resident, Non Domiciled Individuals
Often, monies held offshore by non-domiciled individuals will be generating very little return. The individual cannot
bring the money onshore to spend in the UK, as this would give rise to an immediate 45% tax charge (assuming they
are an additional rate tax payer).
Legislation introduced in the Finance Act 2012 states that post 6 April 2012, if a non-domiciled, UK resident individual
who are taxed on the remittance basis, remits offshore monies to the UK and makes (within 45 days) a “qualifying
investment” (which includes an investment in an EIS qualifying company), not only will such income not be treated as
remitted to the UK, but it could also generate a 30% income tax credit to offset against the individual’s UK tax
liabilities.
In the event that the individual disposes of their investment following the minimum 3 year period, the individual may
either:
•
Reinvest the monies within 45 days
•
Send the money back offshore within 45 days (any profit can remain onshore without triggering a taxable
remittance)
•
Keep the money onshore, paying the prevailing rate of tax on the sums originally remitted
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Important Information
• This presentation relates to the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture
Capital Trusts (VCTs). This presentation is issued by Ingenious Media Investments Limited (Ingenious Investments), which is
authorised and regulated in the UK by the Financial Conduct Authority (the FCA) under the Financial Services and Markets Act
2000 (FSMA).
• The information in this presentation does not constitute or form part of any offer for sale or solicitation of any offer to buy or
subscribe to any EIS, SEIS or VCT. Any decision in connection with an investment in any EIS, SEIS or VCT should be made only
on the basis of information contained in the relevant Information Memorandum or Prospectus. If an investor is in any doubt about
the content of the relevant Information Memorandum, Prospectus and/or presentation and/or any action he or she should take,
they are strongly recommended to seek advice immediately from a financial adviser authorised under FSMA who specialises in
advising on the opportunities referred to in this presentation. In the event of a conflict between this presentation and the relevant
Information Memorandum or Prospectus, the relevant Information Memorandum or Prospectus will prevail. An investor’s attention
is drawn to the risk factors set out in the relevant Information Memorandum or Prospectus. Nothing in this presentation, the
relevant Information Memorandum or the Prospectus constitutes investment, tax, legal or other advice by Ingenious Investments
or Ingenious Ventures (a trading division of Ingenious Capital Management Limited). An investor should seek advice about their
own financial position in relation to entitlement to tax reliefs.
• No representation is made or warranty given as to the accuracy, completeness or achievability of any projections, views,
statements or forecasts, which are illustrative. The projections, views, statements and forecasts herein are based upon various
assumptions and estimates which involve significant elements of subjective judgement and analysis and which are subject to
uncertainties and contingencies; actual results could differ materially from those set forth in such projections, views, statements
and forecasts. Investments made in any EIS or SEIS or by any VCTs are likely to be illiquid.
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