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EIS investments can be suitable for clients
for a number of tax planning reasons:
Defer (potentially indefinitely) the
payment of Capital Gains Tax
Income Tax relief to offset a large Income
Tax bill
Shelter investments from Inheritance Tax
The potential for tax free capital growth
EXAMPLE OF INVESTING TO OFFSET
TAX ON A CAPITAL GAIN
James, a higher rate taxpayer, has made a
taxable gain of £20,000 due to the sale of an
investment property. With the current CGT
tax-free allowance of £11,000 (2014/15), he
would be liable for CGT at 28% on £9,000
(£20,000 – £11,000) which is £2,520.
If this £20,000 is invested in an EIS
qualifying company within three years of
the sale of the property then the CGT can
be deferred (saving the client £2,520), and
only becomes due when the EIS investment
is exited (but there is nothing in the rules
to prevent rolling this over again into a
new EIS investment). In this way CGT could
be deferred indefinitely. In this case the
tax bill dies with the investor, which when
combined with the potential for Inheritance
Tax relief, can make EIS investments
very attractive for estate planning.
Advisers with clients who anticipate a large
capital gain in the next twelve months,
or who have made a large capital gain
in the last three years, may consider EIS
investments to defer the tax liability.
EXAMPLE OF OFFSETTING A
LARGE INCOME TAX BILL
Looking at another scenario. If Stephen
had a successful couple of years and
incurred annual Income Tax bills of say,
£40,000, the total possible claim would
be £80,000 (£40,000 x2, remembering
that Income Tax relief can be backdated
to the previous year). An investment of
£266,667 in EIS qualifying companies
would mean that the client could claim
the entire £80,000 in tax relief (£80,000 x
30%, the rate at which relief is available).
Clearly this is a useful tool for
advisers who want to minimise
their clients’ Income Tax bills.
EXAMPLE OF USING EIS TO
POTENTIALLY SHELTER INVESTMENTS
FROM INHERITANCE TAX
The mother of our hypothetical client, a
widow, has an estate valued at £1m. Her late
husband had left the whole of his estate
to her, keeping intact his entire tax-free
allowance (£325,000) which then passed
on to his widow. Her tax-free allowance
(nil rate band) increased to £650,000 as a
result. She is therefore liable for 40% tax
on the assets of her estate above £650,000
on death. £1m – £650,000 = £350,000
x 40% = £140,000. This is a significant
tax bill and will reduce the value of the
estate being passed to her loved ones.
By investing into an EIS investment with
shares that qualify for business property
relief, she can potentially reduce her IHT bill
(providing that the shares have been held
for a minimum of 2 years and she still holds
the shares on death). A £100,000 investment
would reduce the taxable value of her estate
by £100,000 (£1m – £100,000 – £650,000
= £250,000). She would therefore only be
liable for IHT on £250,000 (£250,000 x 40% =
£100,000), reducing her IHT bill by £40,000.
IHT relief on an EIS investment is not a
given. The shares must qualify for BPR
and there are a number of conditions
that need to be met for this, but it is
an added advantage of EIS and is very
useful for tax and estate planning.
PREVENTION OF TAX
AVOIDANCE
The government has acted to prevent
abuse of the tax reliefs before. It introduced
two new ‘no disqualifying arrangements’
tests in section 178 of the taxes act to stop
schemes where the primary objective was
tax avoidance and there was no commercial
purpose, or where another business
was indirectly funded by EIS money. The
first test was whether more than half of
the funds raised via the EIS were going
to another party; the second test was to
establish if there was another party to the
arrangements that could be carrying out the
same business the EIS qualifying company
is proposing to undertake. This is to prevent
service companies interposing EIS between
themselves and their customers to give
them a route to raise cheaper finance.
One sector that has previously attracted
a lot of investment is renewable energy.
Renewable energy technology is now very
mature and well understood. It performs
reliably within known parameters and
very reliable predictions can be made
for how much wind or solar irradiation
can be expected over multi-year periods.
Finally, government subsidies to encourage
investment in renewable energy
infrastructure (such as Feed-in-Tariffs
or Renewable Obligation Certificates)
mean that revenues from renewable
energy can be predicted with a high
degree of certainty. The infrastructure
is uncomplicated, easy to maintain and
profitable for 20+ years, therefore buyers
can be lined up to take on the assets
once installation has been completed.
Overall this made renewable energy a
relatively low risk, asset-backed investment
that can be used to structure exit-focus
EIS investments. However, the treasury
has deemed that structuring investments
in this way is not in the spirit of the EIS
scheme, and Feed-in-Tariffs were excluded
from EIS qualification in 2011 (with the
exception of hydro-power or anaerobic
digestion plants) and Renewable Obligation
Certificates were excluded in the 2014
Budget. The Finance Bill was granted Royal
Assent on 17 July and is now effective.
The EIS industry is very keen to retain its
close working relationship with HMRC and
ensure that EIS investment opportunities
are structured in the spirit of the scheme
and not simply as tax shelters. This is partly
driven by European Legislation. The EIS was
given State Aid approval in May 2011, and
in paragraph 63 the European Commission
noted that ‘In light of the forthcoming
revision to the RCG (Risk Capital Guidelines),
the Commission notes that the UK
Government undertakes to modify the EIS
and VCT schemes to the extent that would
prove necessary to comply with a possible
Commission proposal for appropriate
measures following the entry into force of
revised risk capital guidelines after the end
of 2013.’
“The UK EIS scheme gives
very generous tax breaks to
encourage investment into
companies that would otherwise
find it difficult to raise capital.
It is extremely important that
these tax breaks are targeted to
support investment into genuine
risk capital investments”
SarahWadham, EISA
TAX PLANNING
