Attractive tax breaks as part of a diversified investment portfolio
Enterprise Investment Schemes (EISs) are tax-efficient vehicles set up to encourage investment into small, unquoted trading companies. Following the changes announced in various Budgets, the EIS is the only tax-efficient investment offering a capital gains tax (CGT) deferral. CGT on the disposal of other assets can be deferred by reinvesting the proceeds in EIS shares.
An EIS allows Income tax relief of 30 per cent (2013/14) on a maximum subscription of £1 million (provided that an individual does not acquire an interest of more than 30 per cent of the company). Individuals may elect to treat their subscription for EIS shares, up to their maximum annual allowance, as if made in the previous tax year.
Gains are exempt from capital gains tax if held for a period of 3 years or more. Any size of capital gain made on the disposal of any kind of asset can be ëdeferredí by reinvestment into EIS-compliant companies. The deferred gain is then due on the sale of the EIS shares unless the sale is to a spouse or on the death of the shareholder.
Investments in EIS-compliant shares can attract Inheritance Tax business property relief (BPR) equal to 100 per cent of the investment value on gifting or on death.
EIS funds fall into two distinct camps: those that wind up after the three years required for investments to be held to qualify (known as planned exit EISs) and those that carry on until investors agree that a wind-up makes commercial sense. For EIS funds and portfolios, the manager may not be able to invest as quickly as hoped. This may reduce the return on your investment, and the investment may lose its EIS status or tax relief may be delayed.
Investments in smaller companies will generally not be publicly traded or freely marketable and may therefore be difficult to sell. There will be a big difference between the buying price and the selling price of these investments. The price may change quickly and it may go down as well as up.
Investing in an EIS is at the top end of the risk scale, but in return you receive attractive tax breaks. As high-risk investments, EISs may only be suitable for wealthier investors as part of a diversified investment portfolio. The past performance of an EIS is not a reliable indicator of future results and you should not subscribe to an EIS unless you have taken appropriate professional advice.