High earners looking for tax-efficient investments, who have already saved the maximum Isa amount (£15,000) and reached the £40,000 tax-free annual pension allowance, have other options available that will not incur scrutiny from HM Revenue & Customs (HMRC).
Launched two decades ago, Enterprise Investment Schemes (EISs) encourage investment in small UK businesses by offering tax breaks to investors, in order to compensate for the high risk associated with investing in a start-up or small business.
The last year for which official statistics are available – 2012 to 2013 – indicates that approximately 20,000 taxpayers invested £881mn in EISs and received tax benefits as a result.
A total of £1mn can be invested into EISs each year, with an income tax relief at 30 per cent of the cost of shares immediately available.
The tax relief can also be used to offset income tax in the previous year, but the shares must be held for a minimum three year period to enable an investor to qualify.
Under the schemes, share disposals are also free from capital gains tax after three years and any losses made, minus the income tax relief, can be offset against income tax payable for that year.
This essentially means that any taxpayer with liabilities for capital gains tax can use EIS investments to enable a payment deferral for up to three years.
After they have been held for two years, EIS shares qualify for business property relief, which makes them exempt from inheritance tax and very valuable to any investor looking at planning their future estate handover.
Businesses can also benefit from investing in EISs, with up to £5mn per year available in tax relief, but certain conditions must be met before an investment can be made.
