Consider Enterprise Investment Schemes for tax savings

By Lancashire Business View

27 Feb 2018

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By David Hardman, director, Ludlow.

Enterprise Investment Schemes (EIS) were introduced in 1994 to encourage investments into “smaller UK business” by offering attractive tax reliefs to investors.

Qualifying businesses must have fewer than 250 employees, can be no more than seven years old, and there is an investment limit of £5m from all venture capital schemes.

Investments can be made into a single company or, through a professional investment manager, into a portfolio of qualifying companies.

An EIS must be held for at least three years from the date the investment completes and the shares allotted. It often takes up to six months to be fully invested and six months to exit, so the investment is more likely to be held  for four years, but can be longer and depends on how the investment is progressing.

The tax benefits include: Income tax relief of up to 30% on investments of £1m in a tax year Unlimited, 100% deferral of capital gains tax, with liability eliminated at death 100% inheritance tax relief after two years if the companies still qualify Loss relief can be claimed if the investment underperforms An EIS can be an attractive way for an owner to extract profit from a business. For example, a dividend of £100,000 offset by an EIS investment could reduce tax liability from 32.5% to a net cost of 2.5%.

EIS is ideal for experienced investors who have an existing portfolio and are comfortable with the higher risk nature of smaller, unlisted companies.

Often there is no market for such shares and it may be very difficult to make a disposal. Due to the nature of the underlying companies, there is a higher risk of them failing. The tax treatment of EIS is based upon current HMRC policy at the time of writing.

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