Investors looking to rush to back SMEs by the end of the tax year – thus taking advantage of the current EIS tax breaks – are needlessly taking risks, according to Radius Equity director Gary Robins.
Under current rules those who invest in SMEs through EIS receive income tax relief at 30% on a maximum annual investment of up to £1 million – as well as 100% CGT relief on qualifying assets held for three years.
But investors can “carry back” tax reliefs to previous years – making the end of the financial year more of an arbitrary target than a true financial milestone. Despite this, Radius Equity figures estimate that around two-thirds of the total £1.015 billion invested in small businesses via the EIS last year was invested in the last three months of the tax year to April.
Robins is advising investors to avoid rushing to invest before April – warning that an emphasis on quantity over quality could lend some investors in hot water.
“This rush to beat what investors believe is a critical deadline can mean that hasty decisions are made to invest at a time when demand can heavily outstrip the supply of good quality EIS investment opportunities,” he said.
>See also: The Annual Investment Allowance explained
“It means that investors may rush into investing in an EIS product that is inappropriate for them simply in order to meet an imaginary deadline. The flexibility of EIS means that there is nothing to be lost by searching a bit longer for the right investment.”
Relief can also be carried back through the SEIS scheme, according to Robins. Under SEIS, investors receive 50% income tax relief on a maximum annual investment limit of £100,000, as well as generous CGT relief (see box below).
Since SEIS was only launched in April 2012, carry back is available on shares purchased in the 2013/14 tax year onwards.
Robins explained that, as SEIS is relatively new, “the same principles apply”.
“And the tax breaks are even greater,” he added. “So investors would do well to plan ahead to take full advantage by making carry back work for them.”
Key facts on EIS and SEIS
Enterprise Investment Scheme
Seed Enterprise Investment Scheme
|Investee companies can now have up to 250 employees and gross assets up to £15million
|Investee companies must have fewer than 25 employees, have assets of less than £200,000 and be less than 2 years old
|Investee companies are allowed up to £5million of investment per annum
|Investee companies are allowed a maximum of £150,000 investment in total through the SEIS
|Investors can now invest up to £1million per annum in EIS qualifying companies
|Investors can invest a total of £100,000 per annum in SEIS qualifying companies
|Investors receive 30% income tax relief either in the year the investment is made or a claim can be made for relief against income in the previous tax year.
| Investors receive 50% income tax relief either in the year the investment is made or a claim can be made for relief against income in the previous tax year.
|Investors can roll over unlimited capital gains into qualifying investments. The rolled over gain comes back into charge when the EIS shares are sold.
|Capital gains accrued in the 2013-14 or 2014-15 tax years may qualify for 50% reinvestment relief if invested in one or more SEIS qualifying businesses.
|Investors pay no CGT on EIS qualifying shares if disposed of after being held for at least 3 years.
|As with EIS, no CGT is payable on gains from assets after being held for at least 3 years.