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.

As retirement planning becomes increasingly more complicated, holding Venture Capital Trusts (VCT’s) or  Enterprise Investment Schemes (EIS’s) in your portfolio may prove beneficial.

Venture Capital Trusts.

VCTs are companies that are listed on the London Stock Exchange. They are run by a fund manager and aim to make money by investing in other – largely small or early-phase – companies.

VCTs can provide 30% income tax relief on new investments of up to £200,000 per tax year, they do not attract capital gains tax and they can pay regular tax-free dividends which makes them attractive for pension investors.

However, shares in a VCT must be held for at least five years to keep the tax relief. If sold before that time, the tax benefit will be lost.

Enterprise Investment Schemes.

The EIS is a government scheme designed to help smaller companies raise finance.

An EIS offers income tax relief of 30% on investments up to £1 million. The maximum permissible investment per individual, but shares must be held for at least three years from the date of issue. It should also be noted that income tax will be payable on any dividends paid.

As with VCTs, there is no capital gains tax payable on the disposal of an EIS after three years and there is also the ability to defer capital gains tax on different assets and benefit from an inheritance tax exemption after two years.

Whilst offering potentially advantageous tax advantages, both the VCT and the EIS are not investing in well-established companies and therefore carry a potentially higher risk than investing in blue-chip companies.

Advantages and risks Venture Capital Trusts and Enterprise Investment Schemes.

To understand the advantages and risks of these investments, it is wise to speak to an investment adviser. Anstee & Co. has advisers who are highly experienced in this field and will be happy to discuss whether these might be suitable investment vehicles for you.  VCTs should be considered a longer-term investment and may be higher risk and more difficult to realise than other types of investments.  Past performance is not an indication of future performance. The value of VCTs and EISs may fall as well as rise and investors may not get back what they originally invested.  They may not be suitable for all investors.  The tax treatment of these investments will depend on your individual circumstances and may be subject to future legislative change.

How Anstee & Co can help you.

Why not arrange an appointment with one of our independent financial advisers to find out if  Venture Capital Trusts and Enterprise Investment Schemes could help you.