SNAPSHOT2 min read

Ask an expert: “I’ve just sold my business. What are the benefits of investing in an Enterprise Investment Scheme?”

Amanda came to us for advice after selling her online business. EISs allowed her to defer some of her CGT liability – and build a portfolio of early-stage investments in sectors she is passionate about.

14/02/2023
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Authors

Rosie Gibbs
Wealth Planner

After recently selling an e-commerce business, Amanda has six million pounds to invest. She has a capital gains tax bill of £900,000 and an income tax liability on a large dividend payment she received earlier in the tax year.

She is not ready to retire yet and is comfortable investing for the long term, with appetite to take on higher-risk investments. Amanda wants to build a diversified portfolio that includes private assets.

How we helped

We met with Amanda to better understand her objectives and develop a plan for the next chapter of her life. As part of a holistic planning review, we recommended that she invest £300,000 across two Enterprise Investment Schemes (EIS), specifically ones that qualified as “knowledge-intensive.” While the rules (see below) would have allowed Amanda to invest a larger amount, we felt this represented an appropriate initial allocation to high-risk, private investments in the context of her wider asset base.

EISs provide finance for early-stage, unquoted trading companies by offering a range of attractive tax reliefs to investors who buy new shares in the underlying companies. These are higher-risk, illiquid investments. They are not suitable for all investors and should be used as part of a wider wealth management strategy.

EISs come with a particular benefit for those who have recently sold businesses: they allow investors to defer the capital gains realised on disposal. This applies to gains of any size, made up to three years before and one year after the EIS investment is made.

Our approach allowed Amanda to start building an allocation to early stage, private assets within her portfolio, in line with her objectives and risk appetite. By investing £300,000, Amanda was able to claim income tax relief of £90,000. By specifically investing in knowledge-intensive EISs, she was able to ensure that this was offset against the tax due on the dividend payment received earlier in the tax year (see explanation below).

Amanda was also able to defer £300,000 of the capital gain made on the sale of her business - for as long as the money remains invested in EIS-qualifying businesses. This equates to £60,000 in deferred tax, based on current corporate gains tax (CGT) rates. The gain will not come back into charge until money comes out of the EIS investments, at which point we will assess the suitability of reinvesting into another EIS in order to continue deferring the gain.

Care is required when considering these types of investments. Investments must be appropriate for the investor and considered in the context of his or her asset base. The tax benefits also need to be carefully assessed. Tax can only be reclaimed if it has been accrued in the first place. No tax will be rebated if there is not a tax bill to offset against.

EIS Investments – the rules

EIS investments attract income tax relief at a rate of 30% on the amount of the net subscription, with the maximum relief in a tax year of £300,000, on an investment of £1,000,000. This limit is increased to £2,000,000 if the investment is into knowledge-intensive companies. Shares in EIS companies need to be held for three years in order to retain the income tax relief. Any growth of the investment is free from capital gains tax and shares in EISs are also exempt from inheritance tax if they are held for two years prior to, and still held on death.

EIS investments also offer the ability to “carry back” all or part of the investment to the preceding tax year, allowing an investor to offset the available tax relief against income tax paid in the prior tax year.

With conventional EIS investments, funds are drip-fed into a series of qualifying companies identified by the EIS manager. Each time an investment is made, the investor receives an EIS3 certificate with the details they require for their tax return. In practice, this can make it difficult to manage the timing of the tax relief as it can take up to 18 months for a manager to deploy funds.

EIS investments that qualify as knowledge-intensive differ. The investment date for income tax relief purposes is the date that the fund closes; the investor receives a single EIS5 certificate. This means that the investor is able to ensure that they receive tax relief in the tax year of the fund close date - or the previous tax year using the “carry back” rules. It is worth noting, however, that it can still take 18 months to receive the certificate from the manager.

Investors should only invest in private assets (and other illiquid and high risk assets) if they are prepared and have the ability to sustain a total loss of their investment. No representation has been or can be made as to the future performance of these investments.

Whilst investment in private assets can offer the potential of higher than average returns, it also involves a corresponding higher degree of risk and is only considered appropriate for sophisticated investors who can understand, evaluate and afford to take that risk. Private Assets are more illiquid than other types of investments. Any secondary market tends to be very limited. Investors may well not be able to realise their investment prior to the relevant exit dates.

This communication is for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and relief from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any transaction or investment. Past performance is not a guide to future performance and may not be repeated. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Your capital is at risk when investing.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Authors

Rosie Gibbs
Wealth Planner

Topics

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.