What is the Enterprise Investment Scheme (EIS) ?

EIS Income tax relief declaration (30% relief)

Let’s be honest. If you are not willing to deal with high risk, you’re better off not investing in small companies. Some small companies will succeed and make their investors a lot of money shortly. However, others will have a hard time getting there – or worse yet, will declare bankruptcy.

Now, the government is aware of this issue and provides Enterprise Investment Scheme (EIS) investors with tax incentives. Said taxes reduce the negative impact of those investments that go wrong and increase the positive outcome of those that succeed.

Bear in mind, as a disclaimer, that tax rules may vary at any time given, and benefits rely on circumstances.

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What is EIS Tax Relief?

Up to 30% of income tax relief

Provided that you invest £100,000, you can get up to a £30,000 tax reduction on your annual income tax bill. However, you must hold the shares for a minimum of three years to be eligible for this. Also, as expected, you need enough income tax liability from the beginning.

Generous contribution allowance

If an amount above £1 million gets invested in knowledge-intensive companies, you invest up to £2 million per tax year. A knowledge-intensive company refers to innovative and fresh businesses that spend on research and development.

Carry back

Provided that you hold the tax allowance, you’re eligible to carry it back. You can set off the tax relief to the previous year’s tax bill, which could result in receiving back the tax you already paid.

Tax-free growth

Considering you have claimed tax relief and companies qualify, there’s commonly no need for you to pay CGT during the realization of EIS shares.

Deferral of capital gains

If you acquire a taxable gain and invest it in an EIS-qualifying investment, you can defer the capital gain as long as the money remains invested and the EIS rules are met. You may earn a taxable gain by selling a property, for instance.

Profits generated up to three years before the EIS investment and one year after can be deferred. Yes, even if you have already paid the tax, you can postpone the gain.

Once you withdraw your funds, the gain reverts to you, and you must pay CGT at the current rate. Nevertheless, you might continue deferring said gain by investing in another EIS.

Inheritance tax relief

Provided that an investment in an EIS-qualifying firm is held for two years and at the time of death, it should be eligible for 100 percent inheritance tax relief.

Loss relief

Let’s say things don’t go as intended. You might choose to deduct any losses from your income tax bill, excluding the income tax relief obtained. Do you know what this means? It means that up to a loss of £1-£38.5 can be reduced.

It reduces losses and increases gains. How?

Say you invest £100,000 in an EIS. Due to the income tax relief of up to 30%, the effective net cost could be around £70,000. Along with loss relief, it can affect your ROI, regardless of your investment is successful or not, as shown in the table.

Loss relief permits you to compose off any misfortunes against income tax. In the event that your investment falls to zero, you could subtract the £70,000 loss from your taxable income.

This gives a potential duty saving of £31,500 and means the greatest viable misfortune loss could be just £38,500 (viable expense of £70,000 less misfortune help of £31,500). In the meantime, on the off chance that your investment grew by half, because of the duty help, you could be checking out a viable gain of 80%.

Gm professional accountants have offices located in London Canary wharf, London Wimbledon ,Ilford Essex and Birmingham.

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