I am often asked about Enterprise Investment Scheme (EIS). Often people are aware that they are a way of saving tax but are not sure if they are right for them. So here is a simple, straightforward guide.
The Enterprise Investment Scheme is a tax- efficient investment that was introduced by the Government back in 1994. The idea was that it would incentivise people to invest in small companies based in the United Kingdom. The inventive being relief on Income Tax, Capital Gains Tax and Inheritance Tax.
There are three types of EIS-
ELS Portfolio
- Although there are rules about the type of companies that can be helped with an EIS, a range of risk is available within this portfolio investment.
- Invest in a range of qualifying companies
- The companies held will typically be larger ones
Single Investment Company EIS
- As the name implies they invest into one business.
- They are often used by investors who have knowledge and confidence in the company
- They are mainly used by investment professionals
SEIS
- They invest in smaller business within this sector.
- Investing is smaller business is seen as being riskier so to compensate additional reliefs are given.
Key relief that is given
You must hold the investment for a minimum of three years to gain the full advantage of the following tax reliefs.
- Tax-free growth. Any growth within the EIS is exempt from Capital Gains Tax.
- Capital Gains Tax Deferral. Capital Gains can be deferred from three years prior and one-year post-investment.
- Income Tax Relief. Thirty percent Income Tax relief on the amount invested. Income Tax relief can be claimed against the tax year of the investment and/or the previous tax year.
- Inheritance Tax Relief (IHT). 100% IHT relief as long as the shares are held for two years at the time of death. EIS shares qualify for Business Property Relief so the investment is exempt from Inheritance Tax.
- Loss Relief. Loss relief may be available at your marginal rate of tax.
What are the risks of Enterprise Investment Scheme?
EISs are considered higher risk investments. Smaller companies typically follow different investment cycles. However, Enterprise Investment Scheme (EIS) can bring extra diversification to your investment portfolio. The contribution limits to an EIS are up to 2 Million in any tax year. This is provided that investments after the first 1 million are made into knowledge-intensive businesses.
Remember-
- Tax rules are subject to change.
- If you sell your EIS early you will lose the tax relief.
- Your capital is at risk. You may not get back as much as you put in. In the worst case scenario, you could lose all of your capital.
- Investing in small companies is inherently risky. These companies may not perform as hoped and in some cases may fail altogether.
- EISs should be considered as long-term investments. They may be higher risk and more difficult to realise than securities listed on a stock exchange.
Who could benefit from Enterprise Investment Schemes investing?
Individuals who are-
- Looking at medium to long-term investments.
- Looking for an alternative as you are close to your annual pension contributions allowance.
- Not attracted to Trusts but have an IHT issue.
- Wanting to reduce their income tax liability.
- Wishing to defer Capital Gains Tax and subsequent inheritance tax, on disposal of property, land shares or other investments.
How Anstee & Co can help you with EIS.
As I said at the start this is only a simple guide. It is important that you get independent financial advice. Our advisers will only make a recommendation after getting to know you and your financial situation. Other investment and tax strategies may be more appropriate. Why not contact us today to see how we can help you.
We have offices located at-
- Kettering, Northamptonshire
- Stamford, Lincolnshire
- Birmingham, West Midlands
- London, Central London
Our independent financial planners also make use of meeting rooms in Towcester, Northampton, Wellingborough, Worchester and Bedford. Meetings can also be arranged at your home or place of work at a time that is convenient for you.