In order to respond to this query, I assume that you are likely to be a high rate tax payer in the future as you are employed on a high salary or self-employed with a high level of earnings. Also I am assuming that for some reason or the other do not want to consider contributing to a pension scheme either because you are already paying the maximum or that you want more control over your money.
If those assumptions are correct then I believe it’s worth mentioning the benefits of investing in an Enterprise Investment Scheme.
Risky but rewarding
To qualify for EIS the shares must be newly issued by small unquoted companies, so by their nature the investment will be relatively high risk. In return for taking that risk you can receive:
- income tax relief equivalent to 30% of the amount you invest (within limits); and
- deferral of tax on any amount of capital gains reinvested in the EIS shares; and
- if the company fails – a capital loss which can be converted into an income tax relief, less the income tax relief already given on investment.
You must be resident in the UK for tax purposes to take advantage of these tax reliefs, and generally not be connected with the company.
We particularly favour investing in a portfolio of EIS companies to spread the risk of your investment.
Income tax relief
The income tax relief is given on up to £1 million that you subscribe for EIS shares in each tax year. You can elect to claim income tax relief either in your current tax year or the previous tax year, or both! This is helpful to many people, as often they do not know the full extent of their tax liabilities until many months after the end of the tax year.
For example if we look at the financial year past income tax bands for high rate tax started at £34,371. So you could invest as much as £115,629 in an EIS and relate this amount back to the previous tax year 2012-2013.
For this year income tax bands have changed so high rate tax start at £32,011, so you could arrange to set off an amount of £117,989 against this year’s tax bill.
Secondly, where you have obtained, and kept, income tax relief on the EIS shares, the gain made when disposing of those shares is exempt from capital gains tax. You must keep the EIS shares for at least three years to achieve this tax relief.
Finally, if you make a loss on the EIS shares that loss can be set against any capital gains you make in the same tax year or later period. Alternatively you can elect for the capital loss to be converted into an income tax loss to reduce the amount of income tax you pay.
As you can see for high rate tax payers Enterprise Investment Schemes can be particularly attractive, if you have sufficient funds to invest but before you rush off and invest in an EIS do seek out advice from a quality adviser, you need to be advised by someone who has a good knowledge of the EIS market but is also knowledgeable about tax.
Ray Best can help you protect your financial future. To find out more, simply click here!