Enterprise Investment Schemes (EIS) at their most effective

As we approach the end of the tax year, Enterprise Investment Schemes (EIS) and “Seed EIS” (SEIS) will be high up the agenda for a number of our clients.

 

These are high-risk investment vehicles that attract significant tax benefits because they invest in small businesses. The government has repeatedly asserted its commitment to EIS in recent years. While tax avoidance has become a sensitive issue lately, we see EIS as an important and well-established opportunity for clients to optimise their tax position.EIS are only suitable for certain types of clients, so we thought it might be helpful to set out the circumstances where they make.

 

EIS are only suitable for certain types of clients, so we thought it might be helpful to set out the circumstances where they make most sense. That is, to outline a perfect EIS/SEIS client.

 

If a client can tick the following boxes, then EIS and SEIS can form part of an effective investment portfolio:

• An adventurous attitude to risk;
• A high ‘capacity for loss’ (i.e. their lifestyle won’t be impacted by a drop in the value of their investments);
• A 40% or 45% income taxpayer, who expects to pay a similar rate for the foreseeable future;
• Someone who has already made sizeable pension contributions and may be approaching Annual or Lifetime Allowance limits;
• Someone who has paid a Capital Gains Tax bill in the past three years, or expects to pay one in the next twelve months;
• An estate worth more than the nil rate band (currently £650,000 for a married couple)

 

In such circumstances, the tax benefits can be extremely attractive:

• 30% tax relief on investment (so every £1 invested costs 70p)
• The ability to reclaim, defer and potentially extinguish previous Capital Gains Tax bills;
• No CGT on disposal;
• The ability to off-set investment losses against one’s future income tax bill;
• No Inheritance Tax if held for two years

In the right circumstances, it adds up to an attractive ‘satellite’ investment opportunity to sit alongside a larger ‘core’ portfolio.