What are Enterprise Investment Schemes and how can they help your tax planning?
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Article written by Kellands Hale our preferred independent advice firm.
This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfacts.co.uk does not endorse the content.
At the start of the new tax year, many people’s thoughts will naturally turn towards tax-efficient investments and ensuring that pension contributions and ISA pots are maximised. But with limits on ISAs and increased restrictions on pensions, once these options are maxed out the next question should be ‘what’s next?’
The answer could be Enterprise Investment Schemes or EISs as they are also known.*
EISs are a decades-old tax planning tool regularly used by investors for a multitude of purposes. An incentive created and driven by the UK Government, this well-established scheme encourages investment in early-stage growth-centred companies focused on innovation.
For those who have heard of EISs, they may know of them as high-risk investments. And it’s true, they are long-term investments in unquoted and illiquid stock. But with high risk can potentially come high reward – provided by both the significant target returns on such schemes and the generous tax incentives offered by the UK Government to investors.
And what’s in it for the Government you may ask? There are some very impressive tax reliefs on offer and some will be suspicious as to why HMRC are being so generous. Investors will rightly feel uncomfortable with the thought of tax ‘evasion’ or tax ‘avoidance’ – this is neither – it is tax incentivised investing fully supported by the Government and doing good for the British economy. Britain boasts an incredible variety of entrepreneurs, and EIS investment encourages and supports such innovation.
The EIS scheme was launched in the mid-90s by the Government to encourage investment in early-stage companies that help to support the backbone of the UK economy. These fledging start-ups often struggle for investment and funding due to the high-risk nature of investing in a new company. However, that is precisely why the UK Government offers generous tax advantages on such investments, as this reduces the financial risk for investors.
Investment in an EIS supports job creation, increases productivity and innovation, and boosts growth. So basically, for the Government and HMRC, encouraging EIS investment is good business sense!
We have described the substantial returns and touched on the generous tax reliefs on offer via EIS investments, but there are specific nuances and very stringent rules that must be applied. EIS investing is a complex area and detailed knowledge is required to avoid the potential pitfalls of investing in this space. But there are many benefits, so if you think that this could be a useful tool for your situation and want to learn more, then Kellands Hale (the preferred independent financial advice firm for Moneyfacts.co.uk_ can be contacted for more information.
*There are two other useful schemes that can be used for similar purposes - VCTs and SEIS - but in this blog we are focusing on EISs due to the varied and generous tax reliefs that are offered.
**Relief varies according to tax bracket. 45% applies to additional rate taxpayers.
***And if you have claimed income tax relief also.
Risk warning: Tax relief depends on an individual's circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status. Always seek advice from a qualified financial or tax adviser.
There are a few potential pitfalls, some of which are outlined below.
Kellands (Hale) Limited is authorised and regulated by the Financial Conduct Authority. The information contained therein should not be regarded as an offer or solicitation to conduct investment business and should not be viewed as personal financial advice, but instead it is intended to provide information only as an overview of possible considerations or options. Formal financial recommendations will be made in writing to you once the decision has been taken by you to formally appoint Kellands as your advisers and we have gained a clear understanding of your personal circumstances, needs and objectives.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.