ENTERPRISE

INVESTMENT SCHEME

What is the EIS?

• The Enterprise Investment Scheme ("EIS") is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.

• There are five current separate EIS tax reliefs:

Income Tax Relief

• Income tax relief on contributions of 30% ,

• Example• Initial investment                              £ 50,000• Less income tax relief at 30%         (£15,000)• Net cost of investment                     £ 35,000

CGT Deferral• CGT Deferral Relief - Tax on gains realised on a different asset

can be deferred indefinitely, where disposal was less than 36 months prior to the EIS investment or 12 months after it.

• Example (assuming income tax relief also claimed)• Initial investment £50,000• Less income tax relief at 30%          £(15,000)• Capital gains Deferral at 28%             £(14,000) • Net cost of investment                      £21,000

• Shares sold in 3 years no gain      • Proceeds £50,000• Deferred gain chargeable on      £50,000• Deferred CGT at 28%                       £(14,000)• Net proceeds                                   £36,000  

• A profit on a £21,000 net investment of £15,000 or 71.42%

CGT Freedom

• CGT Freedom – No Capital Gains Tax payable on disposal of shares after three years.

• Example (assuming income tax relief and deferral as on previous slide.)• Initial Investment £50,000• Less income tax relief    £(15,000)• Capital gains Deferral at 28%     £(14,000) • Net cost of investment                      £21,000

• Shares sold in 3 years with 25% growth         • Proceeds                                        £62,500• Tax on £12,500 gain                         £0.00• Deferred gains chargeable on         £50,000• Deferred CGT at 28%                        £(14,000)• Net proceeds                                   £48,500     

• A profit on £21,000 net investment of £27,500 a profit return of 130%.

Loss Relief

• Loss Relief – If EIS shares are disposed of at any time at a loss (after taking account of income tax relief), any loss can be offset against an investors capital gains or his income tax in the year of the disposal or the previous year.

• For gains offset against income tax, the net effect is to limit exposure to 35% for a 50% tax payer and 42% in the pound for a 40% tax payer if the shares were to become totally worthless.

• Alternatively the losses can be offset against CGT at the prevailing rate which is up to 28%.

Examples Of Loss Relief Against Income

•Initial Investment                             £50,000•Less income tax relief                     £(15,000)•Net cost of investment                    £35,000•Shares value after 3 years £0         •Proceeds                                        £0.00•Net loss                                          £(35,000)

•Loss relief at 50% (40%) on £35,000 £17,500 (£14,000) •Net loss £(17,500) (£21,000)

•Percentage of initial investment 35% (42%)

Example Of Loss Relief Against CGT

•Initial Investment                         £50,000•Less income tax relief                £(15,000)•Net cost of investment                £35,000

•Shares valued at £0         •Proceeds                                     £0.00•Net loss                                       £(35,000)

•Loss relief at 28% on £35,000    £9,800•Net loss                                       £(25,200)

•Percentage of original outlay 50.4%

Inheritance Tax Exemption

•EIS investments usually qualify for Business Property Relief (BPR) and are thus 100% exempt from IHT after they have been held for two years.

•The effective cost of the investment may therefore be reduced to approaching zero taking into account the other tax benefits of investing in an EIS.

Example of IHT Relief

• Initial Investment                              £50,000• Less income tax relief                      £(15,000)• Capital gains Deferral at 28%           £(14,000) • IHT relief at 40%                              £(20,000)• Net cost of investment                     £1,000

• IHT relief assumes value of investment is £50,000 at death if it is more then the IHT relief is 40% of the larger amount.

EIS Compared With Other Tax Efficient Investments

VCTs ISAs Pensions EIS

Income Tax relief 30% Nil up to 50% 30%Capital gains deferral Nil Nil Nil Up to 28%IHT free N N Y/N YTax free exit Y Y Y/N Y/NTax free dividends Y N N/A NLoss Relief N N N Y Limits 2011/12 £200k £10k £50k £500k

Min. Period 5 yrs N/A To age 55 3 yrs (IHT 2yrs)

EIS Relief At Work• The combination of reliefs offered by the EIS scheme can

substantially increase returns whilst mitigating risk.

• Used together they can prove to be one of the most flexible and tax efficient investments currently available.

• The following example scenarios illustrate this point. 

• The following examples assume the investor is a 50% taxpayer who has utilised his annual CGT exemption and will therefore pay tax on any capital gains at 28%, or, where he has an overall loss, that he has other gains, including income chargeable at 28% against which to relieve the loss.

Case Study • 56 y/o male with an annual income of £80,000

• Share Portfolio £250,000• 12 month performance: 20%• Gain £50,000• CGT allowance £10,600 • Taxable gain £39,400• Tax due £11,032• Net gain available £38,968

• Net share portfolio value £289,968

Case Study With EIS

• Split portfolio £225,000 Shares and £25,000 EIS

• Gain on Shares 20% £45,000• CTG allowance £10,600• Plus CGT Deferral £25,000• Taxable gain £9,400• Tax due £2,632• Net gain £42,368• Plus EIS tax relief £7,500• Net available £49,868 • Total net share portfolio £274,868

• Plus EIS of £25,000 TOTAL £ 300,000

IHT Case Study

• £ 250,000 share portfolio all above nil rate IHT band

• IHT due of £100,000 hence portfolio only worth £150,000 on death

• Portfolio split and £25,000 put in EIS’s

• £ 7,500 tax relief used to fund WOL 2nd death policy for £ 100,000

• Portfolio value restored and EIS outside IHT

IHT Case Study

• Investor has £ 50,000 to invest for income but also wants to shelter it from IHT

• Invests £ 50,000 into EIS

• Receives £ 15,000 tax relief - spends at £5,000 pa over 3yrs– Equivalent net return on £50k of 16.67% pa (40%) or 20%

(50%)

• After 3 years if investment still £ 50,000 reinvest in to further EIS, – Another £15,000 tax relief generated provides, more ‘income’

• EIS remains outside IHT after 2 years

Share Structures

• Simple 25% equity model

• £2,000,000 gross requires £8,000,000 return to breakeven (£5,600,000 net)

• At £2,000,000 investors have recovered £500,000 and are therefore have a loss of net of tax relief of £900,000

• At £10,000,000 investors have £2,500,000

Base PCC Share Structure

• 2,850,000 shares issued with 2,000,000 as B shares, 850,000 A shares.

• A shares carry majority voting rights

• All shares are equal financially and stand equal in terms of Payment until each share has recovered £1.00

• There after there is a profit split which is pre agreed.

PCC Share Structure

• At £2M return each share will receive £2M/2,850,000 or 70.17p

• B shares will have received £1,4M

• At £2.85M return each share gets £1.00

• Above £1.00 profit split at say 75:25 in favour of A shares

• At £8M B shares would see £3.29M

• At £10M B shares would see £3.78M

PCC Share Structure

• The above example is of benefit to the investee companies as it allows retention on the back end of profits.

• It benefits investor as they have a priority position for return of capital and an on going profit share which is uncapped.

EIS PORTFOLIO MODEL

Sample Portfolios

Green Portfolio

EIS CO.INVEST -

MENTTAX

RELIEF NET INV.PERFORM

ANCE RETURNLOSS/GAIN

LOSS RELIEF

TOTAL RETURN

PERCENTAGE

                   

EIS 1 £5,000 £1,500 £3,500 200% £15,000 £11,500 £0 £16,500 230%

Green Portfolio

EIS CO.INVEST -

MENTTAX

RELIEF NET INV.PERFORM

ANCE RETURNLOSS/GAIN

LOSS RELIEF

TOTAL RETURN

PERCENTAGE

                   

EIS 1 £5,000 £1,500 £3,500 200% £15,000 £11,500 £0 £16,500 230%

EIS 2 £5,000 £1,500 £3,500 100% £10,000 £6,500 £0 £11,500 130%

EIS 3 £5,000 £1,500 £3,500 50% £7,500 £4,000 £0 £9,000 80%

EIS 4 £5,000 £1,500 £3,500 10% £5,500 £2,000 £0 £7,000 40%

EIS 5 £5,000 £1,500 £3,500 10% £5,500 £2,000 £0 £7,000 40%

EIS 6 £5,000 £1,500 £3,500 0% £5,000 £1,500 £0 £6,500 30%

EIS 7 £5,000 £1,500 £3,500 -10% £4,500 £1,000 £0 £6,000 20%

EIS 8 £5,000 £1,500 £3,500 -30% £3,500 £0 £0 £5,000 0%

EIS 9 £5,000 £1,500 £3,500 -80% £1,000 -£2,500 £1,250 £3,750 -25%

EIS 10 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

                 

TOTALS £50,000 £15,000 £35,000 15% £57,500 £22,500 £3,000 £75,500 51%

Amber Portfolio

EIS CO.INVEST -

MENTTAX

RELIEF NET INV.PERFORM-

ANCE RETURNLOSS/GAIN

LOSS RELIEF

TOTAL RETURN

PERCENT-AGE

                   

EIS 1 £5,000 £1,500 £3,500 100% £10,000 £6,500 £0 £11,500 130%

EIS 2 £5,000 £1,500 £3,500 50% £7,500 £4,000 £0 £9,000 80%

EIS 3 £5,000 £1,500 £3,500 10% £5,500 £2,000 £0 £7,000 40%

EIS 4 £5,000 £1,500 £3,500 10% £5,500 £2,000 £0 £7,000 40%

EIS 5 £5,000 £1,500 £3,500 0% £5,000 £1,500 £0 £6,500 30%

EIS 6 £5,000 £1,500 £3,500 -10% £4,500 £1,000 £0 £6,000 20%

EIS 7 £5,000 £1,500 £3,500 -30% £3,500 £0 £0 £5,000 0%

EIS 8 £5,000 £1,500 £3,500 -80% £1,000 -£2,500 £1,250 £3,750 -25%

EIS 9 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

EIS 10 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

                 

TOTALS £50,000 £15,000 £35,000 -15% £42,500 £7,500 £4,750 £62,250 25%

Red Portfolio

EIS CO.INVEST -

MENTTAX

RELIEF NET INV.PERFORM-

ANCE RETURNLOSS/GAIN

LOSS RELIEF

TOTAL RETURN

PERCENT-AGE

                   

EIS 1 £5,000 £1,500 £3,500 50% £7,500 £4,000 £0 £9,000 80%

EIS 2 £5,000 £1,500 £3,500 25% £6,250 £2,750 £0 £7,750 55%

EIS 3 £5,000 £1,500 £3,500 0% £5,000 £1,500 £0 £6,500 30%

EIS 4 £5,000 £1,500 £3,500 -10% £4,500 £1,000 £0 £6,000 20%

EIS 5 £5,000 £1,500 £3,500 -50% £2,500 -£1,000 £500 £4,500 -10%

EIS 6 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

EIS 7 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

EIS 8 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

EIS 9 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

EIS 10 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

                 

TOTALS £50,000 £15,000 £35,000 -49% £25,750 -£9,250 £9,250 £50,000 0%

Blue Sky Portfolio

EIS CO.INVEST -

MENTTAX

RELIEF NET INV.PERFORM-

ANCE RETURNLOSS/GAIN

LOSS RELIEF

TOTAL RETURN

PERCENT-AGE

                   

EIS 1 £5,000 £1,500 £3,500 300% £20,000 £16,500 £0 £21,500 330%

EIS 2 £5,000 £1,500 £3,500 150% £12,500 £9,000 £0 £14,000 180%

EIS 3 £5,000 £1,500 £3,500 100% £10,000 £6,500 £0 £11,500 130%

EIS 4 £5,000 £1,500 £3,500 50% £7,500 £4,000 £0 £9,000 80%

EIS 5 £5,000 £1,500 £3,500 50% £7,500 £4,000 £0 £9,000 80%

EIS 6 £5,000 £1,500 £3,500 25% £6,250 £2,750 £0 £7,750 55%

EIS 7 £5,000 £1,500 £3,500 0% £5,000 £1,500 £0 £6,500 30%

EIS 8 £5,000 £1,500 £3,500 -25% £3,750 £250 £0 £5,250 5%

EIS 9 £5,000 £1,500 £3,500 -50% £2,500 -£1,000 £500 £4,500 -10%

EIS 10 £5,000 £1,500 £3,500 -100% £0 -£3,500 £1,750 £3,250 -35%

                 

TOTALS £50,000 £15,000 £35,000 50% £75,000 £40,000 £2,250 £92,250 85%

Important Notice• Prospective Investors should be aware that the value of the Shares, which will be unquoted, can fluctuate. In addition,

there is no certainty that Investors will get back the full amount which they invest. Having regard to the Company's investment strategy and the tax reliefs available, the Ordinary Shares should be considered as a medium to long term investment.

• The value of Shares may go up or down. An Investor in any Company may not get back the full amount invested; consequently, they may lose some or all of the funds invested. There is no market, nor is there intended to be a market for the Shares at the present time for the foreseeable future. There is no guarantee that the Company's investment strategy will be successful.

• Investors are strongly advised to seek professional advice in relation to the taxation implications of an investment in an EIS qualifying company. There are circumstances in which an Investor could cease to qualify for the taxation reliefs offered by the EIS. In addition, an Investor could cease to qualify for the EIS reliefs if they received value from the Company during the period beginning one year before the Shares are issued and ending three years after the date of issue or from when the Company commences trading, if later.

• There is no guarantee that either provisional or formal EIS clearance will be agreed or that such agreement will not be subsequently withdrawn. In those circumstances, subscription monies will not be returned to Investors. Returns to Investors will be lower in the event that the Company fails to obtain EIS tax relief or if it is subsequently withdrawn, in which case the EIS Income Tax Relief and CGT Deferral Relief referred to above would not be granted..

• It is possible for Investors to lose their EIS tax reliefs by taking or not taking certain steps; Investors are advised to take appropriate independent professional advice on the tax aspects of their investment.

• The information in this document is based upon current taxation and other legislation and any changes in the legislation or in the levels and basis of, and reliefs from, taxation may affect the value of an investment in the Company.

• The subscription for Shares and the performance of Shares will not be covered by the Financial Services Compensation Scheme or by any other compensation scheme.

• The investment described in this document may not be suitable for all investors. Investors are accordingly advised to consult an investment adviser authorised under the Financial Services and Markets Act 2000 and an appropriately qualified taxation adviser, prior to investing.

• Park Caledonia Capital Limited is Authorised and Regulated by the Financial Services Authority. Registration No. 162559