11 July 2008
Opportunities for enterprising investors
A loophole has emerged as a result of the change in the capital gains tax (CGT) rules brought in on 6 April 2008, under which CGT is now payable at a flat rate of 18%.
Possible beneficiaries are people who have incurred a CGT liability at 40% during the last couple of tax years. Subject to certain conditions, if such a person invests a sum up to the amount of the chargeable gain in an Enterprise Investment Scheme (EIS) – within three years of the event triggering the gain – the CGT on the equivalent amount of the chargeable gain may be deferred until the EIS investment is sold. If CGT has already been paid, this can be claimed back.
When the EIS investment is sold, the CGT rate applicable to the deferred gains will now be a maximum of 18% instead of the previous maximum of 40%, a reduction of 22%.
Again, subject to certain conditions, EIS investments offer other tax benefits. 20% income tax relief applies up front on the amount invested up to a maximum of £500,000. Inheritance tax (IHT) business property relief also applies in most cases. Its effect is that, if the EIS investment is held for two years and retained until death, it will not be subject to IHT on the investor’s death. Any gains on the EIS investment itself are also tax free.
EIS investments are not for the faint hearted. The EIS was introduced to encourage investment in small new businesses. Investments are usually pooled, like unit trusts. Tight limits have, however, been imposed by the government on where and how much fund managers can invest. The upshot of this is that only very small companies qualify as suitable for EIS investment. This carries with it high risks, although one of the main providers offers a “protected” scheme designed to mitigate this.
If you would like to discuss the possible use of an EIS investment to mitigate your tax liabilities, please contact Paul Tobias, Head of our Trust & Investment Department,
on 01483 887760.
This article was based upon tax rules applicable at 3 June 2008. Anyone contemplating an EIS investment should only do so after obtaining personalised expert advice.