Lucy Foster discusses how investing in the Enterprise Investment Scheme can benefit wealthy clients' retirement planning
Retirement income planning for high net worth savers became a bit more complicated after 5 April 2011 when the tax relief on pension contributions was reduced from £255,000 to £50,000.
One option to fill the gap is the Enterprise Investment Scheme (EIS), which offers generous tax reliefs for investment in early and growth stage businesses.
Savers can invest up to £500,000 in the current tax year, rising to £1m in 2012/13, and benefit from 30% income tax relief. EIS also offers CGT deferral relief, tax free gains and IHT relief after an investment has been held for two years.
Investors also have the option to carry investments back into the previous tax year and benefit from income tax relief in 2009/10, although this will be at 20%, the prevailing rate prior to 6 April 2011.
Investors can also use EIS investments to defer the payment of CGT, incurred in any of the previous three years.
From a tax perspective, EIS is more flexible than a pension, although the income tax relief available is lower.
But hold on, I hear you say, isn’t EIS extremely high risk? Well, as with all investments, there are degrees of risk. Investing half a million in an entrepreneurial start up, with no track record, is clearly an act of faith but more mature growth stage businesses can offer a different risk profile, with robust business models, proven income streams and solid intellectual property which are also available for EIS investors.
For long-term investors planning for retirement income, using a well-diversified EIS Fund, or managed EIS portfolio service, gives them access to a selection of growth stage companies with realistic exit prospects and the potential for substantial tax free growth. Yes, there will be those companies that fail, but across a diversified portfolio the risks can be well spread.
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