Investments  

Q: What are the pros and cons for clients?

Investment returns available from investment in small, unlisted companies tend to be far in excess of those that can be made from listed companies, she said.

2) 30 per cent income tax relief

You can claim back up to 30 per cent against personal income tax on EIS investments up to a maximum of £500,000 a year, so the actual net cost of investment is 70p in the pound.

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This allowance can be carried back to the previous tax year for offset against income tax. Shares must be held for a minimum of three years from the date they are issued. The permitted investment per individual is expected to increase to £1m from 6 April 2012.

3) Capital gains tax freedom

There is no capital gains tax payable on disposal of shares after three years, provided the EIS initial income tax relief was given and not withdrawn on those shares.

4) Inheritance tax relief

Shares in EIS qualifying companies will generally fall outside the estate for the purposes of inheritance tax after two years, potentially reducing the inheritance tax liability to nil, saving up to 40p in the pound.

5) Capital gains tax deferral relief

In EIS this is not capped at £500,000 and allows up to three-year-old capital gains tax to be rolled over into EIS companies and deferred indefinitely.

6) Loss relief

If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), the loss can be set against either the investor’s income tax (in the year of disposal or the previous year) or capital gains tax liability.

This means the maximum exposure to loss is 35p in the pound for a 50 per cent tax payer (and 42p in the pound for a higher rate taxpayer).

7) Simplicity

There is no requirement to report gains to HMRC as they accrue or at realisation of the investments. Investors can simply receive a cheque and bank it.

The cons of these schemes are:

1) The minimum holding period of three years means investors’ money is locked in.

2) Investments in EIS shares are not readily marketable and the timing of any realisation of an investment cannot be accurately predicted.

3) Because shares in investee companies are not publicly traded or freely marketable, they are valued according to bid price if they are quoted on Aim or using international private equity and venture capital valuation guidelines if they are unquoted. These investments are usually illiquid.

4) Investment risk in EIS companies is also greater than in listed or more mature businesses.

5) Legal and regulatory changes could occur during the life of the fund, which could adversely affect the fund or investors.