The main conditions to be satisfied, which are common to all three forms of relief (CGT deferral, income tax and CGT exemption), are as follows (defined terms being mentioned in italics):
- the shares must be Eligible Shares
- the shares must be issued by a Qualifying Company
- the shares must be acquired by subscription (ie new shares issued by the company and not a transfer of existing shares)
- the subscription must be wholly in cash
- the shares must be fully paid at the time of issue
- the shares must be issued to raise money for the purpose of a Qualifying Business Activity of the company of one of its 90 per cent subsidiaries
- the money raised by the issue must be employed wholly for the Qualifying Business Activity within two years of the issue of the shares or, if later, within two years of commencement of the Qualifying Business Activity
- relief is not available if the total of the tax advantaged Venture Capital Investments made in the company in the year ending with the date on which the EIS shares are to be issued exceed £2m
Eligible Shares: New ordinary shares which carry no present or future preferential right to dividends or to the company’s assets on its winding up and no present or future right to redemption.
- An unquoted company (AIM companies are treated as unquoted) which exists wholly for the purpose of carrying on one or more Qualifying Trades, or a parent of a trading group where the business of the group as a whole does not consist to any substantial extent of anything other than activities which fall within the definition of Qualifying Trade; and
- the balance sheet value of the company’s/group’s gross assets must not exceed £7m immediately before the issue of the EIS shares and must not exceed £8m immediately afterwards; and
- the company/group must not have 50 or more full-time of full-time equivalent employees.
- A new rule will apply for shares issued on or after 6 April 2011 requiring that the company issuing the shares is not in financial difficulties in accordance with European Community Guidelines for State Aid.
Qualifying Business Activity: a Qualifying Trade which is carried on by the Qualifying Company or a 90 per cent subsidiary of it; or research and development carried on by the Qualifying Company or a 90 per cent subsidiary of it, from which it is intended that a Qualifying Tradewill derive. The relevant activities must be carried on wholly or mainly in the UK; for shares issued on or after 6 April 2011 this test will be replaced by a requirement that the company issuing the shares must have a UK permanent establishment.
Qualifying Trade: Any trading activity will be a qualifying trade provided it does not consist to a substantial extent of one or more of the following:
- dealing in land, commodities or futures, or in shares, securities or other financial instruments
- dealing in goods otherwise than in an ordinary trade of wholesale or retail distribution
- banking, insurance or any other financial activities
- leasing or letting or receiving royalties or licence fees, other than from self-created intangible assets
- providing legal or accountancy services
- property development
- farming or market gardening
- holding, managing or occupying woodlands, any other forestry activities or timber production
- producing coal
- producing steel
- operating or managing hotels or comparable establishments or managing used as a hotel or comparable establishment
- operating or managing nursing homes or residential care homes or managing properties used as such
- providing services or facilities for any trade which consists to a substantial extent of the activities listed above and carried on by another person (other than a parent company) where one person has a controlling interest in both trades
Venture Capital Investments: investments which attract EIS income tax relief, investments made by venture capital trusts and investments made under the corporate venturing scheme.
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