The Enterprise Investment Scheme – is the risk worth the reward?

We have become accustomed recently to predictions about interest rate rises. However with uncertainties about the health of the economy and the impacts of Brexit, it is unlikely that we will see significant increases in the near future. The hunt for a home for your capital that will generate more than a mediocre return is likely to continue.

Some investment products come with tax advantages, Individual Savings Accounts being a common example, which effectively increase the rate of return as the income is received tax free. There are however less well known alternatives, such as the Enterprise Investment Scheme (EIS).

For those that are prepared to take more of a risk with their capital, there is of course the stock market. EIS investments also allow you to invest in companies, but the scheme is designed to encourage investment in growing companies, and therefore come with a higher exposure to risk. This risk is in some way compensated by the tax advantages, which include:

• Income tax relief of 30% of the amount subscribed for (up to a maximum of £1 million, or in some cases up to £2million), which can be set against your income tax liability of the year in which the subscription is made, or the investment can be related back to the previous tax year. The relief can be withdrawn if the shares are sold within 3 years.
• The ability to defer capital gains tax liabilities arising on the disposal of other assets by reinvesting the proceeds in EIS shares.
• Tax free capital gains on the disposal of the shares, providing they have been held for 3 years and at least some income tax relief has been given on them under EIS.
• If the company fails, which some of these businesses do, the resulting capital loss can be set against other capital gains, regardless of how long the shares have been held. Alternatively, the loss can be used to generate an income tax repayment, which may be more beneficial depending upon the rates of each type of tax.
• Shares held for at least two years will normally qualify for 100% business property relief for inheritance tax purposes.

As always the devil is in the detail.

For those demanding guarantee that their capital is safe and sound, the EIS scheme may not be for you. However for those with significant tax liabilities, and who are keen to support growing businesses, with careful timing the tax incentives can be significant and go someway to balance the risk of the investment itself.

For further information please speak with your usual Kreston Reeves adviser or contact us here or on +44 (0)330 124 1399.

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