Investor view: “I’ve used all of the tax breaks associated with EIS"

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

Experienced investors have been using the Enterprise Investment Scheme (EIS) to offset income tax and defer capital gains tax (CGT) since it launched in 1994. 

This government-backed scheme offers generous tax reliefs to help compensate for the higher risk of investing in small young businesses, as it aims to encourage investment in the dynamic, job-creating startups and SMEs that help drive the UK economy. Please remember though: tax rules can change and benefits depend on circumstances.

How useful is the scheme to investors?

We chatted with Wealth Club client, property investor and qualified accountant Sanjay Arora, who has been investing in EIS since 2017. These are his views. 

Important: The information on this website is for experienced investors. This article contains personal views - it is not advice nor a research or personal recommendation to invest. Past performance is not a guide to the future. If you’re unsure, please seek advice.

Q. Mr Arora, what made you consider and start investing in EIS?

A. "Well, the main issue I was having was a big capital gains tax bill from the sale of my investment properties. I’m an accountant by background, but since 2005 I’ve concentrated full-time on renting out, as well as buying, refurbishing and reselling, properties – I’ve built up a portfolio, buying them up at auctions.

With the rentals and the buying and selling, I pay income tax and capital gains tax. I remember on one property my business partner and I had £200,000 of capital gain. That’s when I started investing in EIS – the up to 30% income tax relief and deferral of capital gains were a key appeal."

Sanjay Arora – EIS case study

Capital gains deferral relief — an illustration

If you realise a taxable capital gain, you could defer it by investing it into EIS. The CGT due shouldn’t be payable for as long as the money remains invested and EIS conditions are not breached.

Suppose you had gain of £200,000, subject to 28% CGT (£56,000). If you were to invest all of the gain into EIS-qualifying shares, you could defer the entire CGT bill.

If and when the investment is exited or realised, CGT at the prevailing rate would apply on the original £200,000. Alternatively, you could re-invest in EIS.

You could also claim up to 30% income tax relief on an EIS investment – potentially getting back £60,000 in this example, provided you have sufficient income tax liability in that tax year.

This table illustrates the difference an EIS investment could make for a higher or additional rate taxpayer with a £200,000 gain made from the sale of an investment property.

With EIS reliefs Without EIS reliefs
Taxable gain £200,000 £200,000
30% income tax relief £60,000
CGT Deferred -£56,000
Effective balance £260,000 £144,000

This is for illustration only. It assumes CGT at 28%, as applicable to property and receipts of carried interest. The current CGT rate on disposal of shares and other assets is 20%.

To retain EIS reliefs, you need to hold the investment at least three years. Tax rules can change. This is a brief outline of a complex subject – please seek advice if you’re unsure.

Read more about capital gains deferral relief

Q. Which aspects of EIS have you found particularly useful?

A. "I’ve actually used all of the tax breaks associated with EIS – on income tax and capital gains tax. But, also, the inheritance tax [IHT] relief is attractive to me.

To be honest, “IHT-free” could be attractive to everyone. You don’t know what’s happening around the corner, especially with Covid, etc. – and not to be able to pass all your assets down to your children would be tragic.

There’s talk of the Chancellor putting up IHT rates – but that makes such schemes [such as EIS] more attractive, to be honest."

Q. Do you favour a particular sector or particular kind of deal?

A. "I now tend to focus on innovative technology.

[Single-company EIS] Q-Bot was one I’ve found very interesting – my businesses involve property and Q-Bot has developed a clever way of installing underfloor insulation using robots. Another has been [children’s cyber-safety software single-company EIS] SafeToNet – children’s safety on the internet is quite an issue, so I found the opportunity to back the technology attractive."

Q. Historically, you have personally preferred single companies over EIS funds – why is this? 

A. "I like to be able to pick out the sector and company I’m investing in. What attracts me also is seeing the people behind the innovation and looking at their track records, exit strategy and so on, to get more insight into what I’m investing my money in. Investing in a fund, you wouldn’t be able to do all these things.

What I’m actually trying to do is build up a nest egg for retirement. I’m investing to set money aside for the future. 

Understandably, EIS is not for everyone. It’s very important with such investments you’ve got to be in a position where, in case the investment goes sour and you lose money, it’s money you can afford to lose – although the loss could be limited by the loss-relief you could get under EIS."

Q. EIS is high risk by nature, with high growth potential; some investments may do poorly, whilst others do very well. Have you had any particular pleasant surprises or disappointments with your investments?

A. "I’d say the pleasant surprise was SafeToNet – I wasn’t expecting it to do as well as it did. I expected Unibio [protein-developing biotech] to do as well as it’s always done – so that’s one that I expected. 

Of course, these are all still paper gains. Until an exit is achieved, an investment could go up or down in value or even fail – neither has achieved an exit so everything still remains to be seen. 

A disappointment has been West Berkshire Brewery – in the end, it failed and went into administration, but at least I was able to claim loss relief. 

One thing I should mention is that the capital gains you’ve deferred crystalise when a [EIS] company goes bust – meaning you now have to realise the gains you’d declared earlier on.  However, for the current year you’d have a new capital gains allowance too, which you can use – so that could help limit the losses. 

But what I say to others is you don’t have to be an accountant to invest in EIS. Even doing the tax return is quite straightforward – anyone could do it, and you can always ring up HMRC for help."

Q. What are your thoughts on EIS investing through Wealth Club?

A. "I’ve been very impressed with the straightforward and efficient way I can invest: I do the application online, send the money across and that’s it. And then, through your portal, I can look at my investments any time and see how they are performing. 

There are lots of EIS investments available elsewhere, but I’d rather invest through Wealth Club. I know Alex and the team will have looked into these companies beforehand and done the research. You’re not going to be promoting any Tom, Dick or Harry company who wants to raise money – I can be reasonably confident of this, that you do your research.

I also appreciate the helpful information and assistance you’ve given. For instance, when West Berkshire did go down, I found it helpful reading the information on your website regarding how to apply for loss reliefs, what can be claimed back and so on. There is all kinds of information on your website that’s quite handy for investors.

You and your colleagues have been extremely helpful to me over the years – any time I’ve had a query, you’ve been able to sort it out for me straight away. If I get a good service, I tend to stick with it. It’s been excellent, the service you’ve provided – you can quote me on that!"

EIS tax reliefs – in a nutshell

  • Up to 30% income tax relief – a £10,000 investment could save £3,000 income tax. To qualify, you must have sufficient income tax liability.
  • Carry back – you can use a current year’s EIS investment to apply for relief on a previous year's income tax bill.
  • Tax-free growth – normally no CGT to pay on exit, if you claimed income tax relief and the company has remained EIS-qualifying.
  • Capital gains deferral – if you invest the amount of any taxable gain into an EIS-qualifying investment, you can defer tax on the gain for as long as the money stays invested and EIS conditions are not breached (see box above).
  • Loss relief – if the investment doesn’t work out, you could offset any loss, less the income tax relief received, against your income tax bill. So, an additional-rate taxpayer could effectively reduce a total loss of £1 to as little as 38.5p.
  • Inheritance tax relief – EIS shares should be IHT-free, if held for least two years and on death.

The minimum holding period to retain EIS tax relief is three years. You could tax-efficiently invest up to £1,000,000 per tax year (£2,000,000 if including Knowledge Intensive EIS). Tax rules can change and tax benefits depend on circumstances. EIS tax benefits are only available if the company maintains its EIS status. 

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

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