With total tax relief of up to 98%, savvy investors are realising the benefits of Enterprise Investment Schemes.
EIS’s have become increasingly popular with investors following the increase in tax relief from 20% to 30% earlier this year. However, for people who are higher rate taxpayers, it is possible to convert this into a massive 98% tax saving with the right planning.* .
How it works
A lot of the marketed EIS’s seek to protect investors’ capital so that an investment of £1 is targeted to deliver a return of £1 after the minimum three year holding period.
The increase in the income tax relief means that the tax break alone equates to returns on the net investment increasing to 42% net of tax, which is 14% per annum. For a 50% taxpayer the gross equivalent return is 84% (28% per annum). This excludes any return or loss from the underlying investment, which also needs to be considered although as mentioned above, a lot of EIS’s seek to protect the investors’ capital.
The total tax relief is therefore a staggering 98%!
You can also defer Capital Gains Tax to save a further 28% tax and if the investment is held for two years it will be exempt from Inheritance Tax, providing a further 40% tax saving. The total tax relief that can be achieved on making an EIS investment is therefore a staggering 98%!
Window of opportunity
Whilst the Government has confirmed its support for EIS relief, they have stated that they are going to review the rules to ensure that the funds invested in EIS companies actually go to help small businesses, as originally intended by the legislation.
In the Pre-Budget Report later this year (possibly November), we could see changes to the rules around qualifying companies and activities. All this is likely to mean that it will be more difficult for EIS providers to use the capital protection measures currently deployed, which is likely to increase the investment risk considerably. There is, therefore, a window of opportunity between now and the Pre-Budget Report for investors to take advantage of the increased tax benefits, along with the current capital protection measures.
Timing is crucial
EIS investments are normally made towards the end of the tax year to minimise the time period between making the investment and claiming the relief on the tax return. If you make an EIS investment now, when you get your EIS 3 certificate you can ask HMRC to include the income tax relief in your 2011/12 PAYE code so that the full tax relief is received by 5 April 2012.
Investors who are shortly due to receive distributions from EIS’s made before 5 April 2008 should also act now to gain a further 30% income tax relief this year by rolling over the proceeds into a new EIS.
What is an EIS?
EIS’s are one of the most tax efficient investments available and offer potential relief from income tax, Capital Gains Tax and Inheritance Tax. They were originally set up to encourage investment into small, unquoted trading companies.
Whilst EIS's offer excellent tax incentives for investors the underlying investment risk should be considered in conjunction with your IFA.
