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There is a long established practice of governments offering tax incentives for investors to support small business and provide venture capital to the economy.  A current incarnation of such incentives is the EIS, which sits alongside Venture Capital Trusts (VCT’s).

There are a range of tax reliefs for those investing in an EIS including income tax relief, CGT exemption, CGT deferral relief and inheritance tax (IHT) exemption.  Most investors are interested in a combination or all of the reliefs, which can go a long way to offering attractive returns.

Jeremy had a very specific tax problem which was neatly solved through EIS.  As a serial  entrepreneur, Jeremy had a succession of investments and often made significant gains or losses.  He came to us when faced with a large CGT liability at 40% on an investment sold just prior to April 2008.  Not only did Jeremy understand that CGT rates were about to reduce but he also felt that another investment of his would become worthless soon.

Typically an EIS acquisition is held for a minimum of three years in order to achieve all of the tax reliefs available.  Each of the available tax reliefs though has separate rules and requirements.  In this case, Jeremy’s motivation was very much to achieve the CGT deferral relief.  That would enable him to “rollover” his gain so that when it became chargeable to tax he could benefit from what was to be the new rate of CGT of 18%.  Critically this rollover would also cause Jeremy’s gain to become chargeable after the time that he had incurred a loss on the investment that was fast becoming worthless.

By rolling over the gain originally charged at 40% Jeremy was not only able to take advantage of an 18% CGT rate but could also allow have the intervening CGT loss offset as well.  Changing the order of the losses and gains in this way was crucial, as CGT losses cannot be carried-back to an earlier tax year.

Jeremy was not keen to invest in EIS for three years, as like many entrepreneurs he did not want to tie up his capital for that long.  Consequently, we arranged for him to invest in his own bespoke EIS company, rather than a structured solution.  Not only was the business model for the company “low risk” but this structure would give more flexibility to how long his investment was illiquid.  In the end, Jeremy decided to wind-up his EIS investment after about 12 months.  In doing so, he lost the ability to claim income tax relief but secured very large CGT savings and the early return of his capital.

The rules around EIS are often misunderstood and the investments can be dismissed as being inflexible or high-risk.  They are worth closer inspection in many cases.