Strategic options to aid tax planning (FT Advisor)
by Hugh Rogers
EIS investing offers more to investors than just tax relief, provided you’re willing to take the risk.
The Enterprise Investment Scheme (EIS) market has been a well-established part of the investment adviser’s toolbox for many years now.
While the scheme was established as a way of providing support and funding for smaller companies, it is the generous tax breaks that accompany an investment that make them attractive for investors and advisers alike.
It is important to note, however, that EIS investments represent a significantly higher level of risk as they involve taking long-term equity stakes in smaller companies. Investors also have to be able to commit to investing into an EIS for a minimum of three years, and preferably need to look at an EIS with a minimum five-year horizon.
Anyone considering whether an investment into an EIS is suitable for them should seek advice from their independent financial adviser.
That said, the tax benefits that come with an EIS do make them an attractive tool for sophisticated investors seeking ways of increasing their tax efficiency. With the 30 per cent income tax relief available to UK taxpayers on EIS investments of up to £1m per year, the most common usage for a client is likely to be as a tool for reducing an income tax bill.
They can also be used to defer capital gains tax liabilities, but this is only a deferral and not an exemption.
With the recent rises in UK house prices (up on average by 30 per cent during the past five years), coupled with the freezing of the inheritance tax (IHT) nil-rate band at £325,000 until April 2019, it is the eligibility for EIS investments to qualify for business property relief (BPR) after two years that is becoming increasingly attractive to investors.
The advantages of holding BPR-qualifying investments for IHT planning are twofold. First, after two years the investment should qualify for BPR and should therefore be exempt from IHT, as opposed to seven years if a gift is made.
Read the full article here on the FT Advisor website.