Using investment schemes to lower your tax bill

There’s no doubt about it, investment schemes are not for the amateur investor. The rules can be complex, getting out can be tricky, and the chances of losing money are high.

However, if you’re savvy about what you do with your money, you can earn yourself a nice return while making a big difference to your tax bill. The risks are high, but so are the rewards.

The Enterprise Investment Scheme

Set up in 1994, the Enterprise Investment Scheme (EIS) is aimed at encouraging investment in smaller and younger businesses. It does this through providing generous tax incentives to investors who buy shares in EIS-registered companies.

·         Income tax relief

Investing in eligible companies for at least 3 years will net you 30% income tax relief. This means that if you invest £20,000, you would get £6,000 off your income tax bill.

·         Capital gains tax disposal relief

You will not be charged capital gains tax if you hold EIS shares for 3 years. When you come to sell your shares, you will get to keep all of the profit.

·         Loss relief

You can use loss relief to offset any losses against your income tax bill. For example, if you as a higher-rate taxpayer lost £20,000 (£14,000 when accounting for 30% income tax relief), you could save £5,600 (40% of £14,000) by reducing your amount of taxable income.

·         Inheritance tax exemption

You pay no inheritance tax on EIS shares.

The Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) – the EIS’s younger brother – is a more recent venture by the UK government. The scheme applies to shares issued after 6 April 2012, and aims to encourage investment in even smaller companies than the EIS.

Because of the increased risk involved with these investments, the SEIS incentives are even more generous than the EIS.

·         Income tax relief

You can get 50% income tax relief if you hold the shares for 3 years from the date of issue. The relief works in the same way as in the example above.

·         Capital gains tax reinvestment relief

You could claim a capital gains tax exemption if you reinvest gains from a recently sold asset into an SEIS-eligible company. The £100,000 annual investment limit applies to reinvestment relief. This means that you are only able to claim the relief on £100,000 of investments.

·         EIS reliefs

Loss relief, capital gains disposal relief and inheritance tax exemption are treated in the same way for the SEIS than as the EIS.

Get in touch

It is important you seek professional advice before investing in the EIS or SEIS.

Contact us on 01753 892 815 or email to discuss how we can help plan your personal taxes.

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