With unused pensions set to fall into the IHT net from 2027, more individuals may be seeking advice on other methods to reduce their IHT liability. One such option is the Enterprise Investment Scheme (EIS).
The Enterprise Investment Scheme (EIS) is a Government initiative designed to encourage investment in small, high-risk companies by offering attractive tax reliefs to investors. Here’s a breakdown of how the EIS works
How an EIS works
1. Eligibility: To qualify for an EIS, companies must be trading, not listed on the stock exchange, and have fewer than 250 employees. They must use the funds for business growth, not for acquiring other businesses.
2. Investment: Investors purchase shares in a qualifying company. The investment must be held for at least three years to benefit from all tax reliefs.
3. Tax relief: Investors can claim up to 30% income tax relief on their investments. This means if you invest £10,000, you can reduce your tax bill by £3,000.
4. Capital Gains Tax Relief: Any gains made on the disposal of EIS shares are exempt from capital gains tax if held for at least three years.
5. Loss relief: If the investment fails, investors can offset the loss against their income or capital gains tax for the year of disposal.
6. Inheritance Tax relief: EIS shares held for at least two years are exempt from inheritance tax.
Benefits
1. Tax efficiency: The primary benefit of an EIS is the significant tax relief it offers. This makes it a financially attractive option for investors looking to reduce their tax liability.
2. Supporting innovation: By investing in EIS-qualifying companies, clients can support and be part of innovative and cutting-edge developments. This helps drive economic growth and fosters entrepreneurship.
3. Diversification: An EIS provides an opportunity to diversify investment portfolios with high-risk, high-reward opportunities. Investing in startups and small businesses can offer substantial returns if these companies succeed. However investors must be prepared for the risks, there is a risk you may not receive back the amount you invested.
Comment
The Enterprise Investment Scheme is a powerful tool for investors looking to support small businesses while benefiting from substantial tax reliefs. By understanding how EIS works and the benefits it offers, clients can grow their wealth and contribute to economic innovation.
Seek independent financial advice
It’s important to seek independent financial advice when considering an EIS or any other investment strategy.
Capital at risk: EIS investments are typically in early-stage companies, which means there’s a high chance of losing the invested capital.
Limited liquidity: EIS shares are often unquoted, making them harder to sell.
Financial advisors can provide advice based on your unique financial situation, helping you navigate the complexities of investment options and ensuring you make decisions that align with your goals and risk tolerance.
How we can help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice, retirement planning, IHT and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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