At a time when tax is a ‘hot topic’, Malcolm Emery, partner at Stephens Scown, outlines a Government-approved investment scheme that is highly tax efficient.
At a time when the words “Tax Avoidance” conjure up images of Panama, offshore trusts and our very own Prime Minister David Cameron, this does not need to be the case. Whilst the moral stance on tax avoidance is a subjective one it should be remembered that it’s the fundamental right of every UK taxpayer to arrange their affairs in a tax efficient way.
Step forward, the Enterprise Investments Scheme (EIS) which is a government approved initiative which offers individuals generous tax reliefs for investing in unquoted trading companies. The EIS has been around in one guise or another for over 30 years and is the Government’s flagship tax saving opportunity for individuals. The Government consider that fledgling companies offer the greatest opportunity to generate economic prosperity and it wishes to encourage investment amongst taxpayers by offering significant tax breaks. It is a similar concept to the ‘Dragons Den’ TV programme. Smaller companies are pitching you with their ideas for capital growth in return for your cash investment.
The tax reliefs on offer may be summarised as follows:
- Income tax relief available at a rate of 30% on investments of up to £1million providing you do not own more then 30% of the company’s ordinary share capital
- Capital gains tax deferral relief may also be available to defer capital gains realised within a certain time period. This may save tax at rates of up to 28%
- Inheritance tax (IHT) business property relief will be available at a rate of 100% once you have owned the shares for at least two years. This means the value of your EIS shares are effectively exempt from IHT.
John Stone invests £100,000 in Micro Genes Limited which is a company manufacturing machines to detect genetic deficiencies in unborn babies. John acquires 5% of the company’s ordinary share capital. John’s gross income is £200,000. In the past two years John has realised capital gains of £100,000 (after deducting his annual exemptions). Sadly, three years after making his investments John passes away. His tax position is as follows:
|Less: Income Tax Relief||30,000|
|Capital Gains Tax Referral Relief||28,000|
|Inheritance Tax Business Property Relief||40,000|
|Net Cost of Investment||2,000|
Following John’s death the shares will pass in accordance with his Will. If John had set up a trust in his Will to act as a recipient of the shares this may have saved further IHT for his family. It may also have offered his family protection against potential matrimonial and financial disputes happening in the future.
A Final Word
Although this article has focused on the tax benefits associated with the EIS it should be remembered that it is a financial product and, as such, you should seek independent advice on the financial risks of investing before you part with your hard earned cash.
Malcolm Emery is dual qualified as a chartered tax adviser and solicitor. He is happy to answer any queries on EIS, trusts or inheritance tax. Please do get in touch on 01392 210700 or email email@example.com.