Enterprise Investment Schemes – Why 20% income tax relief may be preferable to 30%

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Rules permit Enterprise Investment Scheme (EIS) investors to take advantage of ‘carry back’ which enables the cost of shares to be treated as though they had been acquired in the previous tax year, enabling investors to benefit from income tax relief in the preceding year.

As EIS income tax relief has been increased to 30% for the 2011/12 tax year why would anyone want to carry back to the previous tax year (reducing the income tax relief to 20%)?

  • One off tax bill in previous year: People with a high income tax liability in 2010/11, can carry back to mitigate the previous year’s bill.
  • Access to tax relief cash earlier: Normally taxpayers must settle their outstanding tax bill by 31 January of the following year.  Investors carrying back current investments to 2010/11 tax year will benefit from a reduced tax bill in January 2012 rather than having to wait until January 2013.
  • Maximise total tax reliefs:  Failing to carry back loses out on a valuable tax relief that cannot be regained in the future.  Providing you have sufficient funds you can apply both to carry back for the 20% and apply further later to carry back the following tax year and claim the 30%.
  • Invest £1 million in EIS in 2011/12: Investors who have not used their EIS tax relief in 2010/11 can double their investment in 2011/12 from £500,000 to £1 million by carrying back half the investment to 2010/11.
  • Capital Gains Tax Deferral: EIS investors can defer taxation on capital gains incurred up to 36 months before the date the EIS shares were acquired.  Using carry back in 2011/12, investors with CGT liabilities can defer CGT gains right back to 2008/09 tax year.

It is easy to focus purely on taxation issues, particularly when a lot of potential tax may be mitigated. It is important to take into account that any investment in an EIS involves a degree of risk , therefore do take professional advice.

If you would like to talk to us about EIP’s or any other tax planning issues please contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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