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.
Of course, the siren song of tax saving can sometimes obscure the only important question: is the business and the investment proposition of high quality? But as long as we all focus on quality, the tax benefits tilt the playing field decisively in the client’s favour.
A recently launched website – www.eisguide.info – makes it easy to calculate how the tax benefits interact with underlying performance to enhance returns and reduce risk. The site also helps simplify some of the complex rules around EIS investing.
EIS investing is not appropriate for everyone, but arguably some advisers are letting down their clients by not putting it on the menu.
The Treasury has said that 160,000 people a year would be caught by the lower annual pension cap and about 340,000 by the lower lifetime allowance. For these people, EIS has got to be on the shortlist. But what about middle-aged Isa savers? Putting £5000 each into two companies every year for 10 years would build a diverse portfolio, and – with the benefit of 30 per cent cashback, relief on any losses and no CGT on gains – is perhaps a sensible part of a savings plan.
Additionally, for an older person with sufficient pension income who wants to pass on wealth free of inheritance tax, but retain control of their assets during their lifetime, EIS would also be an obvious choice.
