Enterprise Investment Schemes
An Enterprise Investment Scheme, (EIS for short) is a higher risk investment. Money is invested in either one small company or a series of small companies with the hope that they will grow in value. Some investment managers invest in a series of EIS shares to create a portfolio.
The Government provide generous tax advantages for the investor in these companies as it is hoped that they will generate more tax for the Government. The Government hope to get more tax because companies employ people who pay tax and National Insurance, and companies that make a profit also pay corporation tax on company profits.
The rules for these companies are very strict, to find out more on what qualifies a company for EIS investment – click here.
Contact us by calling 01793 686393 to find out more!
Tax Benefits for the Investor
Income tax relief: As an investor in an EIS you would get 30% tax relief on your contributions. So, if you invested £100,000 you would have £30,000 taken off of your tax bill. And, in theory at least, as long as you hold the investment for at least three years there is no tax to pay when you sell the shares. Although in reality you would probably have to hold them for longer.
It is also possible to elect to have the payment made as though it was done in a previous tax year. This allows you to reduce a previous tax years income tax liability.
Capital Gains Tax Deferral: If you have a capital gains tax liability then you can investment money into an EIS and delay paying this until a future date. This can be particularly useful if you have a capital gains tax bill because you have sold a house as it converts the rate of tax payable from second properties to shares. See buy to let and capital gains tax.
Loss relief: If you invest in an EIS and actually lose money, then the loss is allowed to be used to reduce your income tax bill. So, if you invested £10,000 in a company in an EIS and it went out of business you would have a £10,000 loss.
This £10,000 effectively “cost” you £7,000 as it had originally received £3,000 tax relief. You now get a reduction in income tax. at your highest marginal rate, based on this £7,000. So, if you were a 40% tax-payer, this would be a reduction in income tax of £2,800 – as the reduction is based on 40% of the £7,000 loss.
Inheritance Tax Exemption: Share in an EIS are also exempt from inheritance tax after two years. Shares in an EIS are treated as a business asset; what this means is that they become exempt from inheritance tax under business property relief (BPR) rules. You do not have to have a trust, and you do not have to wait seven years, and there are no underwriting issues (medical tests) to undergo like other methods of avoiding Inheritance tax.
An EIS is a high risk investment. If you are looking for a safer way to avoid inheritance tax, see Inheritance Tax Service for more information.
EIS Risks
There are a number of risks to investing in an EIS.
- There is the risk that you will lose money, as it is investing in small, and new or relatively new companies. You could lose the entire investment.
- Getting money out of an EIS can be difficult, as there needs to be someone who can buy the shares. It lacks “liquidity” as there are not always buyers available.
- Often you might have to wait for the company itself to be sold on or “floated” on a stockmarket. So, even though the minimum to qualify for tax relief is three years, you might be forced to hold it for much longer.
- The EIS company could lose its qualifying status. If this happens within three years you will have to pay back the tax relief, and other reliefs will be lost at that point.
Tax versus Asset
It is true that there are a number of tax benefits to investing in an EIS. But the tax benefits should not be the main reason to invest. It should really be viewed as an investment with added tax benefits, and not a tax reducing scheme that requires investment. EIS can offer a good long term investment and the potential for huge growth.
But remember every EIS is different, with different risks and opportunities – talk to an expert to find out more.
If you have a question about reducing your tax, or investing in an EIS, or just want to have a chat about it with a UK Qualified Independent Financial Adviser, then phone now on 01793 686393 or contact us online.