Tax Efficient Investments

The Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) delivers generous tax reliefs for individuals who provide much needed capital for smaller businesses in the UK. Investors not only benefit from potential upside but also from a number of tax reliefs that the UK government makes available to incentivise investment into EIS. These are summarised as follows.

Income Tax refund at 30%

Available to individuals who subscribe for shares. The maximum investment is GBP 1 million per tax year and hence the maximum income tax refund is GBP 300,000. As of 6 April, 2018 a further GBP 1 million can be invested in ‘Knowledge Intensive Companies’ (KICs). This can be carried back to the prior tax year, if you have not already used your allowance for that year. However the tax refund is dependent on the amount of UK Income Tax paid and will be restricted if insufficient tax has been paid. The shares must be held for three years or the refund is withdrawn.

Capital Gains Tax (CGT) deferral

CGT is deferred when gains are reinvested into EIS shares. The reinvestment of the gain must be made within 36 months i.e. a gain realised in June 2017 must be reinvested by June 2020. The gain will become due when the EIS shares are sold and subject to CGT at the rate applicable at that time.

Where gains are subject to Entrepreneurs Relief, it is possible to defer these and continue to benefit from the reduced rate of CGT when the EIS investment is realised. It is also possible to match an EIS investment with future gains occurring in the 12 months following the EIS investment e.g. an investment made in June 2019 can be matched with a gain occurring up to June 2020.

CGT-Free realisation

No CGT provided the EIS shares are held for three years and you received Income Tax relief on your subscription.

Inheritance Tax relief at 40%

Business Relief at 100% is available on many EIS shares providing they are held for a minimum period of two years and also held at the point of death.

Income Tax loss relief at up to 45%

If the shares are disposed of at a loss it is possible to set this loss (less income tax relief already received) against income.

What types of companies qualify

To qualify for EIS relief the company must be unquoted or listed on the Alternative Investment Market (AIM) with gross assets not exceeding GBP 15 million before share issue and GBP 16 million afterwards. There must be fewer than 250 full-time employees.
Most sectors qualify but there are some notable exceptions including:

• dealing in land, commodities, financial instruments
• financial activities such as banking, insurance and money lending
• property development
• farming
  
• operating or managing hotels or residential care homes
• generation of heat, electricity, power, fuel or gas.
  

EIS and Resident Non-Domiciled Individuals (RNDs)

In order to encourage investment into UK businesses by RNDs, the UK government introduced Business Investment Relief. The relief applies from 6 April, 2012 and means a RND will not pay tax on any non-UK income or gains remitted to the UK providing this is invested in a qualifying business within 45 days. This investment must be made into an unquoted qualifying trading company and a sector for this purpose (although not for EIS) can include property development and rental.

Many of the qualifying businesses will also attract EIS Income Tax relief and so with careful planning an RND can:

• Bring income or gains into the UK that would otherwise be taxable.
• Invest into a qualifying business.
• Claim an Income Tax refund at 30% which can stay in the UK.
• Realise the investment after a minimum holding period of at least three years.
• Remove the proceeds from the UK within 45 days.

This assumes that the RND has paid sufficient Income Tax in the UK to cover any Income Tax refund.

Venture Capital Trusts

Generous tax reliefs are available to investors in Venture Capital Trusts (VCTs). VCTs are designed to encourage investment in small businesses through a fund, providing diversification across several small company holdings.

A VCT is a company admitted to trading on a regulated market, covering markets in the EU and EEA countries. In order to incentivise investment, the UK government provides certain tax reliefs for VCT investors. It should be noted that the tax reliefs are different for investors in new shares and investors in secondary shares. These are summarised as follows:

Income Tax refund at 30%

Income tax relief is only available on subscription for new shares and the maximum subscription is GBP 200,000 per tax year, hence the maximum Income Tax relief is GBP 60,000.

Tax free dividends

Dividends from ordinary VCT shares are tax free. This applies whether the shares were subscribed for or purchased in the market

CGT-free realisation

No CGT providing the VCT shares are held for five years. It does not matter whether you subscribe for newly issued shares or whether you acquire existing shares. However, no relief is given for losses realised on sale.

At least 80% of a VCT’s investments must be into qualifying holdings within 3 years.

At least 30% of funds raised must be invested in qualifying holdings within 12 months, with the remainder to be invested in qualifying holdings within 3 years.

Footnotes

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