Pension changes make space for a rise in EIS
EIS is often overlooked when it comes to considering where to invest additional capital. Yet with the changes to the UK pension scheme – there has never been a better time to consider alternative options to save for retirement. An experienced venture capital fund manager overseeing a diversified and well managed portfolio can increase the likelihood of a generous return whilst still maintaining a higher level of downside protection – thus mitigating the risks that have frequently dissuaded potential investors. This, alongside the tax breaks available, make it a potential valuable alternative/addition to be considered.
With the annual pension contribution limit now at £40,000 compared to the £255,000 it was not too long ago, and the lifetime limit down to just over £1 million, a growing market has emerged of high earners who are looking to supplement their pension with tax efficient investments. For this purpose there exist a variety of options, Enterprise Investment Schemes are usually the target of wealthier more sophisticated investors who are not only capable but comfortable with having large sums of capital tied up in investments for longer periods of time.
What role can EIS play?
The most likely time to consider EIS is in the role of a pension “top-up”. To quote Tony Stott, Chief Executive of Midven “there has been an increasing demand from investors for a government backed tax-efficient product as they look for alternatives following the reduction of the annual pension allowance” This is where SEIS, EIS and VCTs lie and why they have seen such a rise in popularity over the previous few years. With the most up to date figures available showing nearly £1.8 billion invested in 2016/17, a figure that is only expected to rise over the coming years.
Why Inheritance Tax Relief can be the difference?
Inheritance tax continues to be an ever-growing problem, one that is only exacerbated by the rising property prices. The result being a record number of people’s estates are due to pay IHT with receipts having doubled in the last decade alone. With the Office for Budget Responsibility predicting this figure shall continue to rise by another 11% over the next 4 years. So whilst the dividends paid to EIS investors are taxable, unlike the bulk of other VCTs, the benefits include 100% inheritance tax exemption through business property relief providing the investment has existed for over two years. This can play an important role in estate planning.
There are, of course, a plethora of other potential benefits associated with EIS. Investors may receive an income tax relief of 30%, with any loses being offset against income tax. For example, if you invest and lose £10,000, you may be able to reduce your taxable income for the year in which you disposed of the shares by £7,000, resulting in a saving of £2,800 (40 per cent of £7,000) for a higher-rate taxpayer. Although, if all proceed well, as they should with the right investment manager, and you manage to make a profit, you should pay no capital gains tax on said profit. Let’s take that same investment of £10,000 but say the shares were sold 3 years later (the minimum time an EIS investment has to be in place before it is eligible) for £20,000, the investor should keep all £10,000 as profit. These benefits coupled with the gradual reduction in pension allowance mean EIS should be at the forefront of any seasoned investors mind.
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