EIS Income Tax relief restriction for connected parties
The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
In order for investors to be able to claim EIS tax reliefs, the company which issues the shares has to meet a number of rules regarding the kind of company it is, the amount of money it can raise, how and when that money must be employed for the purposes of the trade, and the trading activities carried on.
The amount of Income Tax relief for individual investors in the EIS is 30%, and the maximum annual amount that an individual can invest through the EIS is £1 million. The generous tax allowances are designed to off-set the fact that making investments in these types of companies can carry a high-risk.
There is an Income Tax relief restriction that effectively denies EIS relief for connected parties. This measure is in place partly to ensure that the scheme attracts outside investors. The legislation defines associates as including business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives are defined as spouses and civil partners, parents and grandparents, children and grandchildren. This means, for example, that parents could not invest in their children’s businesses.
However, the list of associates does not include ‘family’ members such as brothers and sisters, aunts and uncles, nephews and nieces, unmarried partners and in-laws. This leaves some scope to attract investment from one’s extended family.