Following my previous blog which covered the key investment objectives of tax efficient investments this month I consider the tax incentives offered across three popular schemes. These are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT).
These investments are government initiatives designed to assist small to medium sized businesses. They achieve this by providing the tax incentives summarised below to investors in qualifying companies.
|Upfront Income Tax Relief||Up to 30%||Up to 50%||Up to 30%|
|Annual limits 2018/19||£1m + carry back * allowed||£100k + carry back allowed||£200,000|
|Tax Free Exit||Yes||Yes||Yes|
|Capital Gains Relief||Up to 28% deferral **||Up to 14% saved **||Nil|
|Tax Free Dividends||No||No||Yes|
|IHT Free||Yes (after 2 years) ***||Yes (after 2 years) ***||No|
|Share Loss relief||Yes||Yes||No|
|Minimum Holding Period||3 years||3 years||5 years|
*increased to £2 million for investments made on or after 06 April 2018 provided that any amount over £1 million is invested in “knowledge-intensive” companies
* *depending on the nature of the asset and the date of disposal
*** the value of the shares may qualify for 100% business relief (BR) from inheritance tax (after a minimum two-year holding period, unless the shares are “replacement business property”)
Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.
It should be noted the income tax relief is given as a tax reclaim, and it is therefore limited to tax paid or due. Income tax relief is available to investors who have a UK income tax liability against which to set the relief, although investors do not need to be UK resident.
The tax incentives can enhance the returns and help to mitigate some of the risk to investors’ capital. However, as these schemes invest in small often unquoted businesses they do represent a high risk to the initial capital invested. Any capital invested can go down as well as up and you may not get back the full amount invested. You should always seek independent financial advice prior to taking any action.
If you wish to discuss how any of the above relates to your circumstances, please get in touch and we will be happy to assist.
Barra Gorman APFS
Chartered Financial Planner