EIS investments also grow free of Capital Gains Tax (CGT) and provide CGT deferral and loss relief. The latter allows an investor to offset any losses against their income tax for that year, which for a 40 per cent taxpayer means the maximum loss to which they would be exposed would be 42p in the pound in each individual EIS company investment.
In an EIS fund with a number of underlying company investments this feature is particularly attractive because even if the portfolio as a whole generates an attractive aggregate return, losses in individual companies can still be offset.
In spite of these clear attractions, recent data from the Office of National Statistics (ONS) showed that ‘unquoted shares’ – a category that includes EIS investments – accounted for only 2 per cent of the IHT relief claimed in the 2010/11 tax year.
When you also consider that ‘cash’ and ‘securities’ typically make up at least a quarter of estates, with the securities proportion rising to reach almost one-third of the assets in estates valued above £2m, it seems there is a planning opportunity for professional advisers and wealth managers to make more use of EIS funds in IHT planning.
Doing so would not only allow part of their clients’ estates to completely escape any IHT liability after two years but would also give rise to significant investment growth potential.
Of course, investing in unlisted smaller companies carries risks. But these risks can be substantially mitigated through in-depth bottom-up research and due diligence on underlying companies. EIS fund managers can also reduce risks by avoiding start-ups and selecting businesses and management teams that already have successful track records. Advisers can take a similar approach by choosing EIS fund managers with strong track records, diversified portfolios and lower-risk investment strategies.
For an estate planning strategy, EIS funds’ combination of tax-free growth potential, the retention of ownership and control of assets, coupled with a short two-year qualifying period for IHT relief, makes them a compelling option.
Susan McDonald is chairman of Calculus Capital
EIS BENEFITS AT A GLANCE
30 per cent income tax relief on a maximum investment of up to £1,000,000;
Provided shares are held for at least three years, profits on sales are Capital Gains Tax (CGT)-free (versus 28 per cent);
Investors can also take advantage of CGT deferral relief by reinvesting in EIS companies;
Capital loss relief of up to 45 per cent of net investment after income tax relief of 30 per cent, representing total tax reliefs of 61.5 per cent of the original investment;