For advisers, the emergence of true EIS portfolio services offers an attractive way forward. In a true portfolio service, there is no pooling and no management of property as a whole, so the Ucis issue goes away. Equally important, the adviser is not required to advise on the selection of individual companies, because the manager takes this responsibility. Clients get the ease and diversity of a fund without the loss of transparency and control normally associated with funds. Let us not forget that subscribing for shares in a UK company is possibly the simplest and best regulated form of equity investment in the world. EIS investing is nothing more than that. How sophisticated do you need to be to invest in UK company shares?
The tax benefits of EIS investing are very generous. In fact, with a 10-year investment strategy it is possible for the tax saving to be more than 100 per cent of the initial investment. There is no obligation to buy an annuity and clients can withdraw 100 per cent of capital with no tax to pay after just three years.
EIS investments offer an upfront income tax relief of 30 per cent and also allow the client to defer capital gains. This is a really powerful combination, enabling clients to immediately reduce their income tax liability while effectively getting an interest-free loan on a CGT liability from HMRC, which they can then use to invest.
Many forecasters also think that CGT may be reduced from its current rate of 28 per cent, meaning that the deferred CGT liability may end up being paid at a lower rate. If the client is in the position to benefit from income tax relief and CGT rollover, the initial net cost of a £100,000 EIS investment would be just £42,000.
For advisers using EIS as part of inheritance planning, it is worth remembering that the deferred capital gain would be entirely CGT-free in the hands of the client’s heirs – in other words, the ‘interest-free loan’ would never have to be repaid.