Farmers seeking to fund diversified projects could obtain significant tax breaks by using a scheme often adopted by small and growing businesses.
Locally owned enterprises such as village shops and pubs are becoming increasingly common, as residents strive to protect valuable amenities. An increasing number are being set up as Enterprise Investment Scheme companies, whereby the business can raise capital funding by offering investors very attractive tax breaks. But it is not just community facilities that qualify – farmers could also use the scheme to develop diversification projects such as farm shops, food manufacturing businesses or tourism.
Most trades qualify, although exclusions include farming, market gardening, property development, commercial forestry and those who provide services primarily to those trades, such as agricultural contractors. So while farmers could not use the EIS to raise money for the farm, they could use it to invest in other new income streams.
Designed to help smaller, higher-risk trading companies to raise finance, the EIS offers a range of tax reliefs to investors. Providing they hold the shares for the qualifying period, normally three years, they qualify for a 30% income tax rebate on the investment made. A £10,000 investment would, therefore, provide a tax rebate of £3,000. Any loss on the disposal of the shares is an allowable deduction against income tax, less the initial rebate received.
The scheme can also be used to defer a Capital Gains Tax liability – and if the share values rise, they can be sold free of CGT after the qualifying period. In addition, after two years the shares qualify for 100% Business Property Relief against Inheritance Tax, meaning that they are not chargeable for IHT if still held on the investor's death.
There are strict qualifying criteria for investments, including a minimum subscription of £500 and maximum of £500,000 in any tax year (potentially rising to £1m from April 2012). All shares must be fully paid up with no preferential rights to dividends, and no investor, or group of connected investors – such as parents, grandparents, children and grandchildren, but, importantly, not brothers and sisters – can control more than 30% of the company's shares.
Unlike pension contributions, EIS subscriptions can be carried back to set against income in the previous tax year, providing a route to reclaim tax after the end of the tax year. The company cannot raise more than £2m from EIS investments in any 12-month period (likely to be £10m from April 2012), and must have less than 50 full-time (or equivalent) staff (possibly rising to 250 from April 2012).
Many people have used the scheme to set up renewable energy projects, but HM Revenue & Customs is clamping down on this sector. Where Feed-In Tariffs or similar subsidies make up most of the trade, further EIS investments will be prevented. This affects projects commencing electricity generation from 6 April 2012: investments made before 23 March 2011, or where electricity generation starts before April 2012, will not be affected.
EIS is a complex area, but when combined with the shift in agricultural support towards Rural Development funding, could provide some excellent opportunities for farmers to develop new income streams. A project using both European Union grant support and EIS tax reliefs could pose a very attractive proposition.
Andrew Vickery is associate director at rural accountant Old Mill. For more information contact him on 01392 214635.