3 ways to save tax prior to 5 April – Part 2

As you’ve hopefully seen, we’ve been sharing ways that you can save tax prior to the end of the personal tax year. To start with, we shared some facts that you might not know about ISAs. This time, we take a look at how Enterprise Investment Schemes can save you tax prior to 5 April.

How Enterprise Investment Schemes (EIS) will save you tax

• The Enterprise Investment Scheme (EIS) is designed to help smaller, higher-risk trading companies raise finance. This is done by offering a range of tax reliefs to investors who purchase new shares in those companies. The EIS works alongside the Seed Enterprise Investment Scheme (SEIS), which is specifically designed to help start-up businesses and carries an even bigger tax relief. Here’s how each of them works:

• A business seeking finance will apply for EIS or SEIS status. If approved by HMRC, this makes them more attractive to investors. Any business can apply (subject to certain rules) and if you’re thinking of raising finance from external investors not connected with the business, get in touch and we’ll talk you through what’s involved

• For those looking to reduce their personal tax bills, when you invest in EIS shares you can claim 30% income tax relief. So, by investing £10k you will have £3k taken off your personal tax bill, meaning the investment has only cost you £7k

• The shares must be held for a certain period or income tax relief will be withdrawn. Generally, this is 3 years from the date the shares were issued. But if the business starts trading after the shares were issued, the period is 3 years from the date the trade actually started (if trade begins within 2 years of the investment being made)

• If you do sell the shares, any gains made will be free from capital gains tax. If you’ve made a loss on your investment, you can choose whether to set the loss against income of the year in which they were disposed of, or income of the previous year, instead of being set off against any capital gains

• Income tax relief can only be claimed by individuals who are not ‘connected’ with the company. This prevents close relatives, employees and those with a shareholding of 30% or more in the company they’re investing in benefiting from the tax relief. You can find out more about the rules surrounding this here

• You can also defer a capital gain by investing in an EIS, with the deferred capital gain being brought back into charge whenever the shares are disposed of (there is no minimum period that the shares must be held to qualify for this deferral)

• As mentioned earlier, SEIS (Seed Enterprise Investment Scheme) shares are even more tax efficient. You can claim 50% income tax relief, meaning an investment of £10k will reduce your tax bill by £5k. The rules are slightly different for SEIS, so get in touch if you’d like to find out more

The details above are just the headlines. The rules surrounding EIS & SEIS investments are complex and there are risks involved, so it is really important that you seek advice before you do anything. If you have the cash to invest in an EIS or SEIS before 5 April and have already identified a suitable investment opportunity, please get in touch and we’ll talk you through what’s involved.

If you’d like to find out more about converting an existing or new business to EIS or SEIS status, please get in touch too, although bear in mind that approval from HMRC will take 6-8 weeks, so you won’t have time to do this before 5 April this year. However, making this change will make your business more attractive to investors in the longer term.

Please get in touch if you need any assistance – we’re here to help.

This is part 2 of a 3-part series designed to help you save tax prior to the end of the personal tax year. Next time, we’ll take you through all the annual allowances that many people fail to use up that will help you save tax prior to 5 April.