Editor’s note: In another look at the world of UK-based Enterprise Investment Schemes, this article, by John Williams, managing partner at Kuber Ventures, looks at aspects of the tax benefits and features of the EIS model. The article comes ahead of the government's 20 March budget in the UK. As ever, while this publication is pleased to share these views with readers it does not necessarily endorse all the opinions expressed in this article.
As the tax year-end approaches, the attention of advisors and their clients will focus on tax-efficient investments and, where appropriate, making the most of the allowances available.
Enterprise Investment Schemes are one way of doing this, as they offer significant tax incentives to encourage individuals to invest in small UK companies, something that the government is keen to support as an alternative to funding from the high street banks.
While the EIS structure is becoming increasingly popular and well known, one commonly overlooked opportunity at this time of year is the “carry back” facility that allows investors to treat all or part of the cost of shares acquired in one tax year as though they had been acquired in the preceding tax year.
Essentially this facility is the tax equivalent of Marty McFly’s DeLorean in the movie Back to the Future, a way of taking a step back in time and allowing relief to be given against the income tax liability of the preceding year rather than against the tax year in which those shares were acquired.
For example, when investing in an Enterprise Investment Scheme, income tax relief can be given at 30 per cent on the amount invested up to a maximum of £1 million. This provides a maximum tax reduction in any one year of £300,000 providing the investor has sufficient income tax liability to cover it.
By making an investment in EIS before 6 April 2013, this tax relief can be carried back and treated as if it was invested in the 2011/12 tax year. This provides a useful tax planning opportunity to reclaim from HM Revenue & Customs a proportion of the tax liability paid in respect of 2011/12.
However, there are a couple of important issues to be aware of. First, the carry back investment will be subject to the rules prevailing in the preceding tax year and in 2011/12 the maximum investment amount was £500,000.
Secondly, in order to be able to carry back to 2011/12, the investment in the EIS-qualifying companies must be made on or before 5 April 2013, which is different from the date monies are actually invested in an EIS discretionary portfolio. The shares must also be held for a minimum period of three years or income tax relief will be withdrawn.
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