By Andrew Aldridge, Partner at Deepbridge Capital
Your clients promise to submit their tax returns well ahead of January every year don’t they? There’s then always an excuse as to why they leave it until the last minute, isn’t there? And then they come to you asking what they can do to pay less tax? This hopefully isn’t every client, but there are a good number who follow this pattern despite your best education.
So, what can you do?
The obvious answer, hopefully, for appropriate clients is to utilise an Enterprise Investment Scheme (“EIS”) proposition which can fully deploy funds prior to tax year end. EIS funds offer an ability to claim 30% income tax against the previous tax year (currently that would be 2020/21) via a Carry-Back facility.
After many years of discussions with advisers and investors, there are a number of matters which perhaps require clarifying, with regards to EIS Carry-Back options. So here are five top tips for offsetting income tax relating to the 2020/21 tax year which may be of use:
1) The definition of Carry-Back
One of the EIS benefits is that they offer the ability for investors to get EIS relief on their income tax liability, not just in the tax-year in which they invest, but also in relation to offsetting any income tax from the previous year. For example, if you invest £100,000 in an EIS which is invested before the close of this tax year, April 5th 2022, you can obtain 30% income tax relief against tax relating to either the 2021/22 or 2020/21 tax year.
2) Always focus on quality
For many advisers and investors, the tax reliefs may well be the initial ‘trigger point’ for considering an EIS investment. However, once it has been established that an EIS might be appropriate then the due diligence starts, and advisers must only recommend an investment based on the quality of the manager, fund and underlying portfolio companies. Carry-Back isn’t enough: it is imperative that you ensure the investment is a good investment in its own right. The cliché is that ‘you shouldn’t let the tax tail wag the investment dog.’
3) Deployment is key
The imperative consideration if wishing to use Carry-Back is the deployment timescale. The date that shares are issued in the underlying portfolio companies is the important date from an HMRC perspective, with this having to be by 5th April at the latest – with fund tax year end closing dates potentially a few days earlier (an example being Deepbridge where Friday 25th March 2022 is our cut-off date for deployment this tax year). Not all EIS managers can achieve deployment prior to tax year end, so check, check and check again. There is great market research now available which should help you identify the relevant funds. Such research providers include the likes of Hardman & CO, MICAP, MJ Hudson Allenbridge and Tax Efficient Review.
4) Venture capital as an asset class
Venture capital as part of a well-diversified portfolio can potentially add significant returns. Research specialists, Hardman & Co, recently published a white paper entitled, ‘how much should clients invest in venture capital?’
This paper concluded that without altering a client’s overall portfolio risk rating, the addition of venture capital could enhance investor returns. When the tax reliefs available via EIS were added, then these returns improved further.
The short-term tax planning need may be the driver for EIS investing at this point in the tax year, but ultimately the normalisation of including venture capital within portfolios may have long-term beneficial results.
5) It’s not just about income tax
Don’t forget that EIS is one of the most tax-incentivised schemes anywhere in the world. With a 100% CGT deferral mechanism, for up to three years previously and one year hence, and Business Relief qualification for IHT exemption after just two years, then you can see how the impact of EIS investments can escalate quickly. At the end of an investment there is then the bonus of all gains being CGT exempt and conversely if companies fail, then there is Share Loss Relief potentially available.
In summary, the EIS Tax reliefs are:
- Investors may claim up to 30% income tax relief, up to a maximum individual investment of £2m per tax year, subject to at least £1m being invested in Knowledge Intensive Companies.
- CAPITAL GAINS TAX DEFERRAL of unlimited gains on the sale of any assets if an EIS investment made within one year before or three years after the date of the disposal of the assets which give rise to a gain.
- NO CAPITAL GAINS TAX on the disposal of shares which have been held for at least three years in EIS Qualifying Companies.
- 100% INHERITANCE TAX EXEMPTION through the availability of Business Relief may be available after EIS qualifying investment has been held for at least two years.
- LOSS RELIEF providing total tax relief of up to 61.5% for a 45% tax payer.
- CARRY BACK relief claims may be made for amounts subscribed for shares in EIS qualifying companies, such that an investment is treated for income tax relief purposes as having been made in the previous tax year, subject to maximum investment levels for that tax year.
EIS investing has never been more accessible, has never witnessed greater demand and could be a great tool for more clients than you perhaps expect.