Five questions to ask yourself before the end of the tax year

As Benjamin Franklin famously observed in the 19th century: “Nothing can be said to be certain in this world, except death and taxes.”

More than 200 years later, Franklin’s words still hold true, and, indeed, taxes need to be front of mind as we approach the end of the tax year. If you are managing investment portfolios, now is the time to take advantage of this financial year’s tax allowances ahead of 5th April 2020.

As a Financial Adviser there are five key considerations most likely on your mind:

• Are your clients reaching the pension tax ceiling cap on pension contributions?
• Is inheritance tax increasingly on their mind?
• Are they looking for a non-market correlated capital growth investment?
• Are they also looking for a well established investment option, rather than jumping into the unknown?
• And are you/they looking for a more balanced portfolio with the potential for tax free profits? ...especially in a world with low bond yields and overvalued stocks?
  

If you answered “yes” to any of the above then it is time to act.

One enduring efficient tax investment vehicle with many benefits well worth considering is the Enterprise Investment Scheme (EIS).

What is the Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) was launched by the UK Government in 1994 to stimulate entrepreneurship and encourage private investors to invest for the long-term in unlisted, early-stage businesses. Advisers are increasingly taking advantage of the benefits of EIS on behalf of their sophisticated clients and enabling the latter to reap the rewards that EIS can bring.

The scheme is becoming more popular with investors in the know, and has exhibited steady growth since its inception. In the 2015/16 tax year, EIS helped businesses access £1.88 bn worth of investment, up from £1.03 bn in 2010/11; and any scheme that has increased 85% despite the challenges of the last five years demands some attention.

EIS has directly stimulated £16.2 bn of investment into UK businesses and helped more than 26,000 companies, according to the Office of National Statistics (ONS). It was specifically designed to boost the flow of growth capital in sectors like: technology, engineering and business services.

Based upon the sound rationale that maintaining a strong pipeline of startups and early stage companies has a vital role to play in the success of the UK economy.  Not all participating businesses will succeed, but EIS can and has helped bolster thousands of success stories, which continue to boost the UK’s economic performance.

Why invest in EIS?

Among the many reasons to consider including EIS in your portfolio, top of mind must be just how tax efficient it is. The scheme boldly offers some generous tax reliefs designed to mitigate the risks associated with investing in unlisted, early stage companies.

Income Tax Relief

Investing in an EIS company can give you up to 30% income tax relief. In other words the cost of investment can immediately be reduced by 30% by claiming this tax relief against your income tax due.

To incentivise investment for the long-term, shares must be held for at least three years. Prior to the budget in November 2017, an investor could claim income tax relief of up to £300,000 per annum on a maximum of £1 million invested in EIS-qualifying companies. Budget changes to EIS mean that an investor can invest up to £2 million per annum in EIS-qualifying companies and receive up to £600,000 of income tax relief.

Free from Capital Gains Tax (CGT)

All profits on investments in EIS-qualifying companies are completely exempt from Capital Gains Tax, providing the shares are held for a minimum of three years. This provides investors with an extremely valuable benefit. Generally, the majority of investments are liable for Capital Gains Tax, but with EIS, this tax free allowance can be applied to other investments. Another less publicised benefit of EIS investment is that you are also entitled to defer CGT, regardless of the source of the capital gain.

Unshackled from Inheritance Tax

Revisiting Franklin’s two certainties in life—death and taxes—EIS investments are exempt from inheritance tax, an important consideration when estate planning. As with the other tax advantages, the investment needs to be held for a minimum time period, in this case two years.

Established and Democratic

Another compelling reason to consider EIS is its proven track record. Now in its 26th year, the established initiative remains open to all and completely democratic. Whether you’re a high net worth individual or have modest sums to invest, you’ll benefit from the same tax reliefs.

You Can Claim Loss Relief

One final point worth noting about EIS investments is the security of potential loss relief if your investment does not perform as well as hoped. There is a sensible acknowledgement that investing in EIS-qualifying companies means investing in startups or early stage companies that have inherent risks attached. Loss relief is available at the marginal tax rate of the investor should the investment be sold for less than you paid for it.

How Do You Invest in EIS?

If you make the decision to invest in EIS, how do you go about it? The good news is that it has never been easier to diversify portfolios to take advantage of its tax relief. The manual, paper-based application and reporting process has been replaced by a new generation of digital platforms that have improved access to EIS investments and increased transparency.

The new platforms harness the latest technology to connect private investors and their advisers with EIS investments. Digitisation is providing even more choice into EIS. Whether you decide to invest in a single EIS-qualifying company or take advantage of an EIS investment fund, investors are able to view and allocate to a wide range of EIS funds or single company investments via a single platform.

The process has never been so efficient, with standardised performance information for investments at your fingertips, enabling you to make informed decisions. This information can be viewed in real-time by advisers and clients alike, and presents a complete and accurate picture of EIS investments that make it easier to keep track throughout the tax year.

Now is the time to make the right choices. Increasingly, EIS is the wise choice for finding alpha.