Q. As one of the many caught in the new 50% tax band in 2010/11 I have been considering ways to reduce my tax liability before the end of the current tax year. A couple of the options that have been suggested are the Enterprise Investment Schemes and Venture Capital Trusts. What are the tax benefits of these schemes and could I expect a return on my investment?
A. Firstly, it’s important to note that as a tax specialist I’m not authorised to provide investment advice. Any investment planning should be undertaken within the assistance of a qualified investment adviser. I will however explain the tax position concerning these two schemes.
For those individuals who are currently 50% taxpayers, the next couple of months do provide an opportunity to consider how your 2010/2011 personal tax liabilities can be reduced.
As stated, two such options to consider investing in are either the Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT). Both these schemes are designed to help smaller unquoted trading companies to raise capital. EIS and VCT schemes are both high risk investments due to the small size of the companies involved and statistics suggest that at least one in ten start-up companies will not survive. Due to this risk, current legislation ensures the tax benefits for investors are attractive with the aim of achieving continuing inward investment.
The important thing to remember with these schemes is that although the tax break will provide investors with an immediate return on their investment, their total returns may be less than originally invested and they could potentially lose their net investment completely.
With an EIS you will be investing in one small, unlisted trading company. VCT’s are designed to encourage investment indirectly into a range of small, unlisted trading companies. Each scheme has slightly different tax aspects which I have outlined below.
For an EIS, income tax relief is achieved at the rate of 20% for a minimum subscription of £500 and a maximum subscription of £500,000 per annum providing the investment is held for at least three years. No capital gains tax are payable on disposal of shares once they have been held for at least three years, provided the initial income tax relief was given on investment, as above, and has not been withdrawn.
Where EIS shares are disposed of at a loss this loss can be offset against the investor’s capital gains or income in the year of disposal or the previous year. The loss relief is unlimited and not restricted to £500,000 per annum. For this reason, EIS can be a particularly tax efficient investment for higher rate taxpayers, because it is possible to defer payment of capital gains tax arising on other disposals when the initial investment is made into an EIS. This may be an attractive option in the current climate, given the recent increase in the rate of capital gains tax to 28%.
An additional consideration is that EIS investments are generally exempt from inheritance tax once they have been held for two years.
VCTs broadly operate under similar principles as the EIS but the investment is spread across a group of companies, all of which must conform to HMRC’s VCT criteria. One of the main differences is the tax relief avaliable on VCT investments qualify for income tax relief at a rate of 30% on subscriptions of up to a maximum of £200,000 per annum.
The investment must be held for a minimum five years and provided the relevant rules are met, any increase in value will be free from capital gains tax.
With both EIS & VCTs if the minimum holding period is not met the reliefs are withdrawn.
As I indentified at the start of this article, these are high risk options and may result in the initial investment capital being lost. Please remember this article has only outlined the tax reliefs available. If you feel these tax breaks may present an opportunity to you it is important to seek professional advice from a qualified investment adviser before making an investment in a VCT or an EIS.
TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.