With continuing restriction on the amount of tax relief available from pension investments, you might be looking at other tax-efficient investment options
Last year, the Institute of Directors said that the schemes were key to opening up the “equity economy”. Many also credited the schemes with helping to ensure 2014 was a record-breaking year for start-ups, with 581,000 companies coming into being in the 12-month period.
So, what is the Enterprise Investment Scheme (EIS)?
The EIS is a tax-efficient way to invest in the new shares of small businesses, offering investors who invest for a minimum period of three years benefit from 30% tax relief as well as exemption from capital gains tax (CGT) and inheritance tax (IHT).
EISs aim to help unquoted companies not listed on an exchange to attract equity investment by offering investors a range of tax incentives. There are several ways to invest, either in single companies, or a collective investment such as an EIS fund.
There is no minimum amount an investor can invest in any one company. However, any single investor cannot invest more than £1 million a year in total into the EIS.
How does SEIS differ from EIS?
The SEIS is a smaller version of EISs, but offers an even greater tax break for investors. SEIS offers eligible investors the opportunity to claim back up to 50% of their investment in eligible companies through income tax relief (for investments of up to £100,000).
Investors will also not pay any capital gains tax (CGT) on the disposal of shares at a profit, and should be able to claim loss relief if the shares are disposed of at a loss.
What else do I need to be aware of?
As well as income tax relief and exemption from CGT and IHT, with SEIS investment there is an extra relief called capital gains reinvestment relief. This is useful if you have recently paid CGT on other investments, as it allows you to reclaim up to 50% of the tax paid if you reinvest that money into SEIS.
Meanwhile, as mentioned previously, EIS offers some form of loss relief. That is, If EIS shares are disposed of at a loss at any time, the loss can be offset against income for that year and the previous year instead of being offset against capital gains.
There are also some other things to take into account when considering EISs. EIS shares must be held for a minimum of three years to benefit from income tax relief, which won’t be convenient for all investors.
Also, capital is only returned when the underlying investment is sold, meaning your money will be inaccessible for longer periods of time. The tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status.
If you would like to know more, please head over to our Open Investments page to view our current investment opportunities.
Please note Enterprise Investment Partners does not provide advice. We recommend you seek independent advice before investing.