Many people dismiss the Enterprise Investment Scheme (EIS) as a poor relation of the Venture Capital...
Many people dismiss the Enterprise Investment Scheme (EIS) as a poor relation of the Venture Capital Trust (VCT), since it implies investment in a single company rather than a spread investment portfolio.
What they fail to grasp is, if approached on a portfolio basis EISs can replicate the structure of VCTs. They often hold 15 or 20 high quality smaller company investments. Accessing the best investments, however, is not at all easy, and this is probably best left to a specialist broker or manager.
Another inaccurate assumption some people make is that all EIS investments are high risk.
Again, this is a hopelessly sweeping assumption. The fact is some are and some aren't.
There is potential risk involved in investing in any young company, but through a rigid process of selecting only safe asset-backed companies and spreading investment as widely as possible across a diverse range of investments, the process can largely be 'de-risked'.
A few years back, a number of asset-backed classes were disqualified from tax relief, but there are still a number of asset classes which still qualify for relief, like pubs, health and fitness clubs and garden centres. But to my mind by far the best opportunity is children's nurseries, a new UK industry growing at a rapid rate, where the underlying asset, a new-build freehold day nursery, is likely to increase substantially in value over the next few years.
In addition, of course, all this uplift in value is free of tax in the hands of the investor.
So, what are the reliefs? Again, they're broader and more flexible than most people realise. The main driver for investment in an EIS is the avoidance of capital gains liability.
Investors can defer, or freeze, the liability to 40% Capital Gains Tax (CGT) if they re-invest the value of the gain in an EIS. In addition, a further 20% outright income tax relief is available for the income tax year in which the investment is made, and this can be claimed by filling in the appropriate box on your self-assessment form.
So, already we're up to a potential tax relief of 60%. On top of this, any profit you make on your EIS investment is free of tax, provided you hold your EIS shares for no less than three years.
A disposal will re-trigger the original CGT liability, but this can (and should) always be re-deferred.
This is a process I describe as 'skimming' ' that is skimming off tax-free profits as you go along, and re-investing the value of the original gain to keep it sheltered. There are two more major benefits ' exemption from inheritance tax (IHT) and the ability to recover CGT paid on any gain made up to three years before.
It should be noted with VCTs, you must make the VCT investment within 12 calendar months of the gain in order to qualify for CGT deferral. Furthermore, VCTs are not tax efficient on death and are subject to 40% IHT along with most other things. Finally, your entitlement to income tax relief with VCTs is limited to £100,000 per tax year whereas with EISs the limit is £150,000 (but there is no limit to the amount of CGT deferral you can claim).
Many people assume if they don't have a CGT liability (and not many do at the moment), then there's no point considering the EIS.
Wrong again. Every portfolio should contain a smaller companies element, quite simply because when, or if, market conditions revive, it is fair to assume that, in general, smaller companies will increase in value faster than mainstream equities.
Martin Sherwood is director & head of tax-efficient solutions at Teather & Greenwood
Slendebroek CEO since 2014
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