Enterprise Investment Scheme (EIS)
Note: EIS investments are inherently risky and investors should expect to retain their investment for at least 3 years to maximise the available tax reliefs. Whilst Morgans promotes EIS products which are structured to provide investors with a significant level of downside protection against commercial losses, no guarantee can be given that an investor's capital will be returned fully intact.
MAIN TAX RELIEFS
Income Tax
- Individual adult investors can obtain a tax credit of 20% on the cost of EIS investments, to a maximum investment of £500k per tax year
- However, up to £500k may also be carried back to the previous tax year for credit against earlier taxes
- The EIS shares must be held for 3 years otherwise the upfront relief is clawed-back by HMRC
Capital losses suffered on disposal of EIS shares may be set against taxable income for the year of the loss or the prior year
Capital Gains Tax
- Individuals can defer tax on capital gains by investing into EIS companies
- There is no maximum amount for this deferral
- The EIS investment needs to be made within the 4 year period commencing 12 months prior to the capital gain arising
- The original capital gain is deferred and becomes taxable when the EIS shares are sold
- This means that gains taxable at 40% pre-6 April 2008 may be deferred into the new CGT regime and taxed at 18%
- However if the gain is not crystallised before death, the deferred amount is excluded from the investor's taxable estate
Inheritance Tax
- Once EIS shares have been held for 2 years they qualify for Business Property Relief
- This means that, for as long as they are retained, they will be excluded from the owner's taxable estate
- There is no maximum amount of BPR and so it is possible to build up a portfolio (potentially using borrowed funds)
SUMMARY
EIS investments still provide a highly tax-efficient means by which investors can access the higher risk/reward business sector and obtain upfront tax relief, whilst benefiting from downside protection against any capital losses via relief against taxable income.
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