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 NRLA 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 £100,000 a year, £15,000 of which is expenses. That leaves her an income tax bill of £21,432 this year
• She makes regular pension and ISA contributions
• Sally is also looking for a method to grow her pot of capital while at the same time addressing some of her annual income tax liabilities
• She has also just sold one of her rental properties and incurred a capital gain of £35,000, leaving her a CGT bill of £8,400 (£35,000 x 24% = £8,400)
• She invests £25,000 with Haatch – a specialist EIS investment manager
• Haatch has a single fee which is 10% upfront (vs the market average of 24% over 7 years, (MICAP May 2024) including annual management charges)
• This leaves Sally with £22,500 to invest through Haatch into EIS-qualifying companies
• She is then able to claim income tax relief of 30% of her £22,500 investment amount, totalling £6,750 to reduce her income tax bill in the year of the investment or in the previous year
• Haatch deploys her investment by buying £3,750 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
• She is also able to claim the £22,500 as reinvestment of the capital gain from her rental property sale. As a result, she can defer £5,400 of her CGT bill (£22,500 x 24% = £5,400) until she sells her EIS qualifying shares. Since she has her full £3,000 CGT annual allowance for this year, she uses it to reduce her remaining CGT bill to zero
• 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 £41,250 on the £22,500 invested.

In addition, loss relief can be claimed on the £7,500 invested in the failed companies. As a higher rate taxpayer, Sally can claim 40% of the £7,500 invested, less the income tax relief already claimed on that £7,500 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 £5,250 (£7,500 – 30%) = £2,100.

Total income tax relief claimed is therefore £6,750 + £2,100 = £8,850.

Final outcome: £47,600 (original capital: £22,500 + £18,750 tax-free capital gain + £8,850 income tax relief – £2,500 fees).

Sally could exit and reinvest her £41,250 into EIS and claim £12,375 income tax relief and as long as she meets the three-year minimum holding period, her income tax relief will be secure. She could then exit again and reinvest again to build up capital and income tax relief and continue to defer her CGT bill as long as she reinvests into EIS-qualifying shares within three years of selling her original EIS-qualifying shares.

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 NRLA 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.