On 6th April 2023, the UK’s Capital Gains Tax allowance was reduced by 50% from its current rate of £12,300 a year. The tax payable on the profit when you sell or dispose of an asset that’s gained in value, the Capital Gains Tax will be further reduced in April 2024, by half again, to a yearly total of £3,000.
As such, exploring tax-efficient investment opportunities is a growing priority among UK investors.
EIS is Fast Becoming the Investor’s Best Ally
For the past 28 years, the Enterprise Investment Scheme (EIS) has been an essential investment alternative for investors in the UK. As one of the government’s venture capital schemes, the EIS enables qualifying companies across diverse sectors and industries to secure funding for the expansion of their privately-owned businesses.
The EIS aims to encourage individuals to invest in promising UK businesses that are not listed on the stock market and therefore carry a higher level of risk. The scheme uses tax incentives to make such investments more appealing to investors by reducing the usual tax obligations. This allows investors to enjoy a more attractive risk-to-gain ratio on their investments.
The Investor’s Best Ally
Now rapidly becoming the investor’s best ally amid these recent changes to CGT allowance, the EIS offers investors two forms of CGT Reliefs. These are:
- Disposal Relief: when shares in an EIS company are disposed of and certain criteria are met.
- Deferral Relief: where a gain arising on a disposal of any asset is deferred against a qualifying investment in shares issued by a company that meets specified requirements.
Disposal Relief means you will not have to pay CGT on a gain upon your disposal of EIS shares. To be eligible you must:
- Have held EIS shares for at least three years.
- Received EIS Income Tax relief in full on the whole of your subscription(s) for the EIS shares without withdrawing any of the Income Tax relief.
By acquiring EIS shares, you can use Deferral Relief to delay any potential gain from arising until a later date. This means that if you defer a gain, it may be charged to CGT in a later tax year, typically when you dispose of the EIS shares. If you receive Income Tax relief on the acquisition of shares, you are also eligible to claim Deferral Relief. It is not mandatory to obtain Income Tax relief to qualify for Deferral Relief.
Disposal Relief refers to the exemption from Capital Gains Tax (CGT) when selling shares in an EIS company, provided that specific conditions are met. To be eligible, the shares must have been held for a minimum of three years, and you must have obtained complete Income Tax relief on your EIS share subscription without withdrawing any of the relief.
Benefits of Investing in EIS
Moreover, investors who invest in an EIS-qualifying company can actually take advantage of five distinct tax reliefs. Some of the benefits of investing in EIS-qualifying companies include:
- Income tax relief of up to 30% on investments up to £1 million per tax year.
- The ability to claim against the current or previous tax year.
- No Capital Gains Tax if the shares are disposed of after three years.
- Capital Gains Tax Deferral on existing liabilities: outstanding or due within three years.
- Have held EIS shares for at least three years.
- Tax relief if any losses are incurred on share disposal, at your current personal tax rate.
However, it’s important to note that despite the many benefits, there are also associated risks that need to be carefully considered based on your own circumstances. For more information on EIS, please visit Westbrooke Associates and download your free guide.
Westbrooke Associates identify a wide range of investment opportunities, backing the businesses you believe in, including investment opportunities in EIS. Register your interest today and explore how we can help you target and capture attractive returns.
