Enterprise Investment Schemes – Will I Still Qualify for Entrepreneurs’ Relief?
Q. I have recently sold my dental business and, with the proceeds now in the bank, I’m considering my investment options.
As I will have Capital Gains Tax (CGT) to pay, my financial adviser has suggested that I consider investing into an Enterprise Investment Scheme, as I will be able to defer the payment of the CGT.
Will I still qualify for the entrepreneurs’ relief 10% CGT rate in the future, seeing as it’s lower than the current personal CGT rate of 20% for higher rate taxpayers?
A. It’s a great question as many of your peers will find themselves in a similar position.
Before we consider your specific question, let’s look at what an Enterprise Investment Scheme (EIS) is.
The purpose of the EIS is to encourage investment in certain unquoted trading companies by providing a range of tax reliefs to investors.
These tax reliefs are available when a qualifying individual buys shares in a qualifying company which are issued to raise finance for a qualifying business activity.
Broadly, a ‘qualifying individual’ is an individual who is subject to UK tax and is not connected with the company.
The EIS offers significant tax breaks to investors. Those who invest up to the £1m limit for a minimum period of three years can benefit from 30% income tax relief as well as exemption from capital gains
and inheritance tax.
The EIS also offers individuals the opportunity to defer gains made on other chargeable assets without limit.
To look at your question now, let’s say for example that your gain is c£500,000 and therefore your CGT bill is £50,000 (Entrepreneurs’ relief of 10%).
If you decided to invest the £500,000 into an EIS, you would be able to defer the whole gain until a future date.
Prior to 3 December 2014, the CGT rate payable upon the sale of shares in an EIS was 28% for a higher rate taxpayer.
Therefore, this did not make an investment into an EIS very appealing as the 10% rate would be lost at the point of investing.
Fortunately, the Finance Act 2015 amended the relevant provisions for gains arising on or after 3 December 2014 so that, provided entrepreneurs’ relief would have been claimable had the gain not been deferred, the 10% entrepreneurs’ relief rate will continue to apply.
Do bear in mind that there’s much more to consider before you invest into an EIS, including risk, tax and which EIS provider to choose.
Therefore, make sure you take the time to do full due diligence and for such a specialist investment, we definitely recommend you take professional advice.
Note that past performance is not a guide to future returns and the value of your investment may fall as well as rise. The above is based on our understanding of current legislation, which is subject to change in the future. The material above is for information purposes only and does not constitute advice and/or a recommendation.