by Nicola Robson
30. March 2010 00:19
Advisers are slowly waking up to the realisation that an investment in an EIS scheme is a great way of IHT planning. The investment falls outside their client's estate two years after investment; there's nothing else on the market that can deliver that much relief in such a short time span.
In this, the last part of the Questions and Answers Series, Julian Hickman aims to answer a question recently posed to him by IFAs relating to the EIS scheme and the IHT opportunities associated with it.
Question 5: I understand that an EIS investment can be used as part of IHT planning for a client. How exactly does this work?
Julian's answer: Strictly speaking, it is not EIS that offers IHT relief, but direct investment into unquoted companies that qualifies for 100% Business Property Relief, once they have been held for 2 years. However, as most EIS investments are made into unquoted companies, an EIS investment generally means the investor will be entitled to IHT relief. There is no limit on the amount that can be invested into an EIS Fund and subsequently gain IHT relief. Effectively this means that an investment into an EIS fund qualifies for 100% BPR once they pass the second anniversary of the date of investment. It is worth just pausing here because EIS funds are NOT like Unit Trusts which are usually fully invested at the point at which you invest. An EIS fund starts with no holdings and begins investing the moment it closes/you subscribe. In the case of an Approved EIS fund, it can take up to 10 months to complete the fund's investment. For an investment of 750,000 full IHT relief will be achieved at something between 2 and 3 years from the date the investment is made.
This is the last instalment of Julian's IFA Questions and Answers session for this tax year but Julian will be back again in April answering more questions on the topic of EIS and Venture Capital investment. Watch this space....
If you have any questions relating to EIS and want to be part of future Questions and Answers series' please email them to nrobson@longbow.co.uk or post a comment below.
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by Nicola Robson
10. March 2010 21:19
Over the next few weeks Julian Hickman will answer a number of questions recently posed to him by IFAs on the subject of EIS and the tax reliefs associated with it. The first of this series relate to EIS Income tax, with forthcoming posts focussing on CGT and IHT rules.
Question 1: As an IFA recommending tax efficient investments to my clients, can you just confirm how an investor can claim income tax relief for an investment in an EIS fund?
Julian's answer: When an investor makes an investment into an EIS fund, assuming he is a UK taxpayer, he will be entitled to income tax relief on his investment of 20%. This is available up to a maximum of £500,000 invested in a single year. However, after changes announced last year, the investor can carry back all or part of his investment into the previous year, effectively allowing him to invest a maximum of £1,000,000 across 2 years – and claiming income tax relief of 20% against a maximum of 500k in each year. It is worth remembering, though, that to achieve full income tax relief, the investments must be held for the qualifying 3 year period. For a client who earnt £150,000 in 2009/10, investing that figure into an EIS now would generate £30,000 of income tax relief. Interestingly, if his earnings rise to £600,000 next year, he can claim to his limit of £100,000 tax relief and, then carry back a further £20,000 against 2009/10.
Question 2: I have heard of approved and unapproved EIS funds, but I am confused about the difference. Can you explain what each does?
Julian's answer: Firstly an explanation of the terms - an approved fund is so called because the EIS fund manager has given certain undertakings to HMRC, and received in return approved status. The most significant of these is that the manager will invest at least 90% of the investors’ money into a minimum of 4 companies within 12 months of the fund’s close. An unapproved fund makes regular investments over a longer timeframe and delivers an EIS certificate for each investment made.
So what? An approved fund has two notable differences as a result of this, an investor can claim income tax relief on his whole investment at the date the fund closes – usually on or around 5 Apr; and the fund issues a single EIS tax certificate later in the year to the investor, which he can submit to the revenue with his tax return. By contrast, in an unapproved fund, income tax relief is gained for each investment, but can only be claimed as and when each one is made.
If you have any questions relating to EIS investments please email them to nrobson@longbow.co.uk.
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