EIS have much to offer
But don’t leave it too late
One of the UK’s most effective tax shelters is being refocused – but investors can still reap the benefits with proper planning.
There’s no doubt that Individual Savings Accounts (ISAs) and pensions are tax-efficient investments for your cash, but there are others that can keep the taxman at bay.
Step forward… Enterprise Investment Schemes (EIS) – More mainstream than you might think!
EIS was introduced by the UK government in 1994 to help small unquoted companies raise finance by offering a range of valuable tax reliefs to investors. According to HMRC* almost £14.4 billion has been invested in nearly 25,000 companies through the scheme which has continued to grow in popularity over the past few years.
3,265 companies raised funds in 2014–15 to the value of £1.8 billion, an increase of 14% on the previous year that includes 1,660 of businesses raising capital for the first time. This is great news for the scheme, which provides a well-established, legitimate, government-backed method of tax planning for investors. In addition, investors know they are helping the UK economy by funding businesses – it’s a win-win for everyone.
SO, WHAT ABOUT THIS TAX YEAR?
Many in the industry have warned financial advisors that the EIS market will face significant capacity constraints in 2017 which will result in missed investment opportunities if investors do not bring forward their due diligence process.
There is no doubt that changes in the marketplace regarding the rules banning renewable assets to be held in EIS has reduced capacity. This combination of less supply and increasing demand for EIS means it is likely that several schemes will close early, ahead of tax year end.
Advance Assurance backlog and delays may have a knock-on effect in terms of the availability of EIS schemes operating at the capital preservation end of the market impacting on capacity still further.
Several providers have launched EIS funds in recent years that invest in qualifying companies that generate more predictable returns. These have created considerable appetite from investors, who find the flexibility of the three-year qualifying period combined with the tax reliefs very attractive.
The Evolve Asset-Focused EIS Portfolios that have been granted Advance Assurance from HMRC allow clients to access asset-backed trading activities that provide a degree of capital preservation and risk mitigation.
A CONSTRUCTIVE INVESTMENT OPPORTUNITY…
At Blackfinch we have seen an increase in opportunities in the construction sector where developers utilise a well-capitalised construction company that can defer some of the payments until the maturity of the projects. Often, these are well run businesses with strong profitability and experienced management teams, as well as substantial assets over which we can take security.
The Evolve Asset-Focused EIS Portfolios allow clients to access asset-backed trading activities that provide a degree of capital preservation and risk mitigation.
AN ENTERPRISING IDEA (OR SEVERAL)…
- As an offset to taxes on bonuses or dividends, particularly for business owners. Increases in dividend tax and reductions in dividend tax credits in April 2016 make this particularly timely
- As part of a plan for UK residents who are not UK domiciled to benefit from EIS benefits while preventing any applicable remittance tax
- As an alternative to pension funding. The total lifetime amount that can be tax efficiently saved into a pension is now capped at £1 million and the annual tax efficient contribution is £40,000. EIS provides a complimentary tax efficient solution
- As part of a plan for the payment of school fees. Average day school fees for example have risen by 342% since 1990**; annual contribution to EIS schemes, including rollover (where appropriate), can result in considerable financial benefits
- As part of a plan to offset or defer Capital Gains Tax (CGT): Up to 36-months prior to subscribing for the EIS shares, so those who have realised a hefty gain over the last three years, for example on the sale of shares, now have an additional incentive to make use of EIS to defer that gain and reduce their tax liability when the gain re-crystallises at the new, lower rates
- Or to mitigate Inheritance Tax after two years.
THE ONGOING OPPORTUNITY
There are a significant number of EIS exits scheduled for 2016, which clearly represents an opportunity for reinvestment, specifically if you reinvest the proceeds of a sale in a new qualifying asset. Replacement Property Relief allow you to count the ownership period of the original asset towards the two-year qualifying period of a new asset.
Investors can benefit tremendously from making the most of the tax-efficient investment options available to them and considering the significant role EIS can play in their tax planning, but it is essential to plan and avoid rushing to invest at the end of the tax year.
CAPITAL AT RISK
** Killik & Co Private Education Index July 2015
Click here to download this article