Tax Efficiency Done Differently

The Enterprise Investment Scheme offers tax reliefs for investments into the shares of small, young, qualifying companies.

• Individuals can reduce their income tax bill for the current or previous tax year by 30% of the amount invested
• Any losses can be used to offset income tax or capital gains tax bills
• Low value entry point from £20,000 (or as low as £2,000 subject to Haatch approval)
• Build investment and tax benefits in a single year or annually
• Portfolio of investee companies means your eggs aren’t all in one basket
• Any growth in the value of your investment is tax-free

You don’t have to be a millionaire to invest for growth and tax efficiency however you will need to Self-certify as a High-Net-Worth Investor or Self-certify as a Sophisticated Investor or Certified Sophisticated Investor or Restricted Investor and this process begins after you complete our Freelancers Magazine Learn More Form.

Take a look at the following case study to see how an investment in an Enterprise Investment Scheme fund could look.

Example Investment

Please note this is not financial advice and is an example only. The numbers are purely illustrative and do not represent target or guaranteed returns. The tax treatment depends on the individual circumstances of each client and may be subject to change in future.

• Sally earns a freelance income of £60,000 a year, £6,000 of which is expenses. That leaves her an income tax bill of £9,032 this year
• She makes regular pension and ISA contributions
• Sally is also looking for a method to grow her small pot of capital while at the same time addressing some of her annual income tax liabilities
• She spends £6,667 with Haatch – a specialist EIS investment manager
• Haatch has a single fee which is 10% up front (vs the market average of 24% over a 7 year period, (MICAP, May 2024) including annual management charges and exit fees)
• This leaves Sally with £6000 to invest through Haatch into EIS-qualifying companies
• Sally is then able to claim income tax relief of 30% of her £6000 investment amount, totalling £1,800 to reduce her income tax bill in the year of the investment or in the previous year
• Haatch deploys her investment by buying £1000 of EIS-qualifying shares in each of six small, young companies with exciting growth prospects. The strategy aims to harness the increase in value of the shares of the companies which do well to cover any losses in the companies that do not
• In order to retain the income tax relief, Sally must hold these shares for a minimum of three years
• There is no income from the shares while she holds them, but Haatch aims to sell the shares after the three-year minimum holding period at a profit. Any gain made on that sale is due to Sally, without any capital gains tax liability

There is no guarantee of a quick sale or of a profit, but an example portfolio might look like this:

The final result is a total return of £11,000 on the £6000 invested.

In addition, loss relief can be claimed on the £2000 invested in the failed companies. As a higher rate taxpayer, Sally can claim 40% of the £2000 invested, less the income tax relief already claimed on that £2000 to set against any income tax* bill she has in the tax year of the failure of the companies or the previous year. The calculation is 40% x £1,400 (£2000 – 30%) = £560.

Total income tax relief claimed is therefore £1800 + £560 = £2360.

Final outcome: £12,693 (original capital: £6000 + £5000 tax-free capital gain + £2360 income tax relief -£667 fees).

Sally could reinvest her £11,000 into EIS, claim £3,300 income tax relief and as she meets the three-year minimum holding period, her income tax relief will be secure. She could then exit and reinvest again to build up capital and income tax relief and possibly capital gains tax relief.

Recent statistics show that over 50% of EIS investors invest less than £10,000, But the upper limit for investments is £2 million per investor per year.

*Another option would be to use loss relief against a capital gains bill in the year of the failure.

If you’d like to learn more about the Haatch EIS opportunity, or EIS in general, complete our Freelancers Magazine Learn More Form.

Disclaimer

It is worth noting that Haatch will dictate the timing of any exits, depending on the terms and conditions of the investment and the availability of exit options. Timescales for reinvestment cannot be guaranteed and Haatch takes up around 6 months on average to use funds in the acquisition of EIS qualifying shares, although always in the tax year of the investment. The EIS qualification clock will only start once the funds have been used to acquire EIS qualifying shares. In addition, any disposal of the shares may not necessarily realise a profit. You should always read the full risk warnings and take independent advice.