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9 simple reasons EIS is one of the UK's best investment schemes

The Enterprise Investment Scheme (EIS) was established in 1994 with a core purpose: to promote investment into  high growth early-stage businesses with the help of generous EIS tax reliefs for private investors (tax incentives which aid in minimising risk while maximising potential returns).

In its 28 years, the EIS has done just that, aiding more than 32,000 businesses in raising circa £24 billion. And the tax incentives offered on EIS-eligible opportunities – from up to 30% income tax relief through to loss relief – continue to be among the most attractive available to UK investors.

Enabling investors to support the development of the next wave of business whilst benefiting from the aforementioned generous tax benefits is one example of why the EIS is such a revered scheme, but there are also many more listed below.

1. It's open to everyone
2. You get immediate income tax relief on your investments...
3. ...and those investments can be numerous
4. It's a well-established scheme
5. Your profits from an investment are tax-free
6. Deferring your existing CGT liability is completely possible
7. EIS investments aren't liable for IHT
8. If things don't go to plan, you can claim attractive loss relief
9. It can provide the perfect introduction to investing

 

 

1. It's open to everyone

Though the nature of EIS-eligible opportunities often mean they’re more appropriate for experienced investors, it doesn't matter whether you're investing £10,000 or £100,000, you'll benefit from the same tax advantages and see the same rate of return per pound invested.

 

2. You get immediate income tax relief on your investments...

One of the most appealing benefits of the EIS is that you can receive up to 30% income tax relief on your investment, up to a maximum of £300,000 relief every year.

To benefit from the tax advantage, you need to hold your shares in the company for a minimum of three years, but this can be easily achievable on the understanding investments into EIS-eligible companies should be considered a long-term investment.

 

3. ...and those investments can be numerous

Each and every year you can make investments into EIS-eligible companies up to a combined total of £1 million. Whilst this could, theoretically, be one £1 million investment, it is more common for this to be a collection of smaller investments.

This allows you not only to benefit from all of the relevant reliefs on every investment, but gives you the opportunity to diversify your portfolio and helps you to mitigate your exposure to risk.

Download: Free Guide to Enterprise Investment Scheme

 

4. It's a well-established scheme

Though some are just now realising its potential, the EIS has been a staple in many investors’ portfolios since its introduction.

In the 2019/20 tax year alone, 36,950 investors claimed EIS income tax relief on their tax returns, with 4,215 companies raising £1,905 million.

 

5. Your profits from an investment are tax-free

Whilst returns can not be guaranteed on an EIS investment, where there is an increase in the value of EIS shares upon the point of disposal, all profits are exempt from capital gains tax (CGT) (that usually amounts to 20% in the UK) with the help of EIS capital gains tax relief.

This is incredibly beneficial when considering that non-EIS investments are liable for CGT above the CGT-free allowance, which is £12,300 as of 2022/23. This means if you invested £10,000 that you subsequently sold for £100,000, your capital gain would be £90,000. With the current CGT-free allowance, this would make your taxable gain £77,700 (and the rate would be dependent upon the source of the gain and your income tax band).

 

6. Deferring your existing CGT liability is completely possible

One of the lesser known benefits of investing into EIS-eligible opportunities, but potentially among the most advantageous,  is EIS deferral relief, a powerful tax advantage that allows investors to defer an existing capital gains tax bill they have accrued to the following year (a process that can effectively go on indefinitely).

The way this works is simple.

Let's imagine a non-EIS investment increased in value by £100,000 when it was sold. Take off your annual £12,300 CGT-free allowance and you'd be liable to pay CGT tax on £87,700 (your taxable gain).

If you invested this £87,700 into an EIS-eligible opportunity, you could defer your CGT tax bill for as long as suits you.

And again, whilst returns are not guaranteed, it would be reasonable to consider your investment may have produced a return in this time that subsequently can pay off the deferred tax bill. Although the capital will still have to be paid eventually, you can make it work for you in the interim.  

Download: Free Guide to Enterprise Investment Scheme



7. EIS investments aren't liable for IHT

If you're thinking about how your estate may exceed your Inheritance Tax (IHT) tax-free allowance (the nil-rate band), you can sit back and relax knowing your EIS investments are completely exempt from IHT and do not count within your nil-rate band.  

EIS inheritance tax relief is achieved after having held the investment for two years, a significantly shorter period when compared to the seven years that asset transfer requires to achieve IHT exemption.

 

8. If things don't go to plan, you can claim attractive loss relief

To aid in offsetting the risks involved with investing into early-stage companies, the EIS offers attractive loss relief at your marginal tax relief.

This effectively means for additional-rate taxpayers, when combining income tax relief and loss relief, the amount of capital you have at risk in an opportunity is reduced to just 38.5%.

 

9. It can provide the perfect introduction to investing

There are a considerable number of routes open for everyone to begin their investment portfolio, but it's hard to argue that the EIS does not represent a good middle ground.

For instance, if we look at the Seed Enterprise Investment Scheme (SEIS), whilst the tax reliefs are more generous, businesses that are SEIS-eligible are at an even earlier stage than EIS-eligible companies and therefore bring with them a greater level of risk.

Conversely, investing in main market equities carries much less risk than EIS, but also doesn't carry many - if any - of the tax reliefs.

With EIS, you could invest £100 and the worse case scenario for additional rate tax payers is you would lose £38.50.

Of course, a loss is still a loss, but it's undoubtedly better to lose - in a worst case scenario - a little over a third of your initial investment than all of it.

There are a wide variety of tax-efficient investing options open to UK investors, all of which offer generous tax reliefs. But the EIS is often seen as one of the most appealing to investors.

Download the Free EIS Investors Guide

 

 

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