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New Tax-Efficient UK Fund Targets Rich Lawyers

by Jason Gorringe, Tax-News.com, London

08 August 2001

The UK's Matrix Private Equity, which already manages Matrix e-Ventures, a new technology venture capital fund based around the Enterprise Investment Scheme, is planning a further EIS fund to target wealthy lawyers and other professionals. The fund will commit £1m to £3m per investment in mature companies that are approaching profitability; there is little appetite at present for investment in high tech companies.

Mark Burgess, managing director at Matrix, said that the fund had been designed in response to demand from law firms, one of the few sectors which is booming away while the productive economy crashes all around it. The fund is aimed at solicitors' trusts, as well as high net worth individuals and plans to raise £20m by October 2001. Burgess said: "I don't know if we can raise £20m. If we raise more than £5m in the current market we will be happy. Once we have proved the model, we can raise another fund in nine months' time."

The Confederation of British Industry's tax committee criticised the Enterprise Investment Scheme for being too complicated. The CBI said that not enough investors were using the scheme because of its complexity, and that the lack of investment undermined the government's original intention of encouraging investment in new businesses. In fact the scheme is no more complex than Venture Capital Trusts, which have been very successful, and the comparative failure of EIS is probably just the result of generally poor investment conditions in the bombed out TMT sector.

Qualifying business activities for the purposes of the EIS include most trades provided that, throughout the company's 'relevant period', they are conducted on a commercial basis with a view to making profits.

A trade will not qualify, however, if, at any time in the relevant period, one or more 'excluded activities' together amount to a substantial part of the trade. Excluded activities are mostly in the service sector, and ironically include law firms.

Companies wishing to raise funds through the EIS need not be incorporated or resident in the United Kingdom. The EIS offers an extremely attractive set of tax reliefs for individual investments into qualifying companies:

  • Reduction of income tax liability by an amount equal to 20% of the share subscription. The minimum subscription is £500 per company and the maximum per investor is £150,000 per annum.

  • Deferral of capital gains tax due on gains realised on a different asset, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it.

  • Exemption from capital gains tax payable on disposal of shares after three years, provided the EIS initial income tax relief was given and not withdrawn.

  • If EIS shares are disposed of at any time at a loss, such loss can be set against the investor's capital gains or his income in the year of disposal.

Subscriptions must be for new ordinary shares: no other kind of share or security can qualify for the scheme. Throughout the period of five years beginning with the date on which they are issued, the shares must not carry any preferential rights to dividends or to the company's assets on its winding up. In addition, they must not at any time in that period carry any right to be redeemed.

The EIS can be used both by trading companies and by holding companies with trading subsidiaries. It is available for start-ups as well as established companies. Companies must meet certain conditions, and the funds which they raise through the scheme must be used for the purpose of a qualifying trade carried on wholly or mainly in the United Kingdom or another qualifying business activity.

To be eligible for income tax relief, investors must not be connected for EIS purposes with the companies in which they invest. However, an unconnected person who invests in a company and then becomes a paid director of it may be eligible for relief despite becoming connected with the company for EIS purposes on account of the paid directorship.

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