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1 Click to edit Master title style Using Enterprise Investment Schemes in Portfolio Strategy 21/11/2014 1

2 Enterprise Investment Schemes What are they? An individual limited company meeting the following criteria Unquoted, or not quoted on a recognised stock exchange e.g. AIM or PLUS. Trading, or preparing to trade in a qualifying business. Have gross assets of under 15m before share raise and 16m immediately afterwards. Have less than 250 employees. Fund raising limited to 5m in any 12 month period. 2

3 EIS Opportunities for Retail Investors An investor is required to meet the criteria of sophisticated and high net worth to be eligible for investment in an individual EIS company marketed on a stand-alone basis. Retail investors may invest through an EIS service that provides the opportunity for diversification across a number of qualifying companies. The retail investor must still have the appropriate attitude to risk, capacity for loss and financial objectives to ensure such a high risk investment is suitable. 3

4 Enterprise Investment Schemes The Operational Process 1. The EIS promoter seeks pre-approval of scheme from HMRC. 2. On receipt of pre-approval, the promoter markets shares in the EIS company. 3. On reaching required subscription shares are allotted, which is the relevant date for investors for their own tax submission purposes. 4. After trading for at least four months the company submits form EIS1 to HMRC. 5. If HMRC accept EIS1 form it will issue EIS2 form to the company. 6. The company is then able to issue form EIS3 to shareholders. 7. Shareholders use the EIS3 form to claim tax reliefs. 4

5 Tax Advantages of Investing in Enterprise Investment Schemes Capital Gains Tax Income Tax Inheritance Tax 5

6 Capital Gains Tax Advantages of Investment The cost of EIS investment may be set against other capital gains crystallised in the 36 months prior to the allotment of the EIS shares or 12 months after the date of allotment. The offset gain is then treated as uncrystallised or deferred until disposal of the EIS shares when the gain re-crystallises. HMRC requires form EIS3 before gains may be deferred and refunds paid. A deferred gain becomes no gain on death of investor. 6

7 Income Tax Advantages of Investment Income Tax refund of 30% of cost of investment subject to availability of recoverable tax. Cost of investment may be allocated between current tax year and prior tax year in any proportion based on date of allotment of shares. Income tax refund becomes permanent after investment held for 36 months. Income tax refund becomes permanent if investor dies within 36 months. Refund can only be claimed from HMRC on submission of EIS3. 7

8 Inheritance Tax Advantages of Investment An EIS investment is treated as Business Property therefore:- The asset is exempt from IHT after two years of ownership. Using Business Property Replacement Allowance, reinvestment of EIS sale proceeds retains the original BPR date and so becomes immediately exempt from IHT. 8

9 Tax Position On Exit On sale of shares Any capital profits are tax free. Capital losses below net of tax cost can be set against taxable income of investor in current or prior year. Original deferred gains re-crystallise and net EIS loss can be used to offset those gains if more tax efficient 9

10 What is an EIS Service? A discretionary management service offered by the EIS provider. The cash placed in the EIS service may be invested in more than one qualifying company to provide diversification. Tax is reclaimed on each underlying holding only on issue of the EIS3 certificate for that company. 10

11 The Wellian EIS Offering An addition to our Model+ Service Wellian can place EIS Investments as part of a portfolio strategy. Wellian will work with the financial adviser to determine an appropriate tax strategy for the client. Wellian will be responsible for the research and due diligence on the investments. 11 The Financial Adviser will be responsible for client suitability and AML.

12 Example Client Pension Income 30,000 Usual Gross Investment Income From Equity Portfolio 70, ,000 Equity Portfolio Value 2.3M Uncrystallised Gain 500,000 Average Percentage Gain 21.7% Spouse s Pension Income 32,000 12

13 Income Tax Optimisation Higher Rate Income 22.5% Tax on Equity Dividends 13,080 EIS offset 30% 13,080 Potential Portfolio Rebalance using average gain of 21.7% 13 Including Annual Exemption using average gain of 21.7% 200, ,613

14 Income Tax Maximisation Pension Income Tax all reclaimed 20% 4,000 High Rate Dividend Tax 13,080 17,080 EIS Offset 30% 17,080 Potential Portfolio Rebalance 313,055 14

15 Maximum Portfolio Rebalance Using Income Tax Carry Back 2014/2015 = 56,933 EIS Offset 2013/2014 = 57, ,553 Potential Portfolio Rebalance = 578,585 15

16 Maximum Portfolio Rebalance Using Income Tax Carry Back and Asset Transfer to Spouse Additional Potential 2013/ /5 Total Income 32,000 32,000 Personal Allowance 9,440 10,000 Taxable Income 22,560 22,000 20% 4,512 4,400 EIS Potential 15,040 14,666 29,706 CGT Exemption 2014/15 11, Portfolio Transfer and Rebalance 187,585

17 Total Tax Saving For Couple Husband Wife Total EIS Investment 114,553 28, ,259 Income Tax Saving current tax year 17,080 4,400 prior tax year 17,286 4,512 34,366 8,912 43,278 Capital Gains Tax Deferred 32,075 8,038 40,113 Total Tax Reduction 83,391 17

18 Normal Trading! Portfolio Annual Turnover 33% Expected Return 8% Yield 3% Growth 5% Annual Growth 115,000 Annual Yield 69,000 Higher Rate Tax Thereon 15,525 Additional Rate Tax Thereon 18,975 Annual EIS Investment 51,750 18

19 Put Losses in Front of Gains Year 1 Taxable Gains 100,000 CGT Paid 28,000 Year 3 Taxable Losses 90,000 Year 4 EIS Investment 100,000 Maximum Tax Recovery Income Tax & CGT 58,000 Year 8 EIS Maturity 100,000 Recrystallized Gain 100,000 B/fwd Losses 90,000 Annual Exemption 10, RESULT = Permanent Tax Saving 28,000

20 If It All Goes Wrong! Year One EIS Investment Gross Cost 100,000 Income Tax Relief 30,000 Net Cost 70,000 Year Six EIS Loss But can offset loss against income 100% Remember an income reducer that can be carried back to the previous tax year Eg. Taxable income 160,000 Net Loss Against Income ( 70,000) Taxable Income 90, Tax Saving 58,127-25,627 = 32,500 or 46.4%

21 EIS Cascade Effect Cascading Annual Investment Year 1 50,000 (50,000) Year 2 50,000 (50,000) Year 3 50,000 (50,000) Year 4 50,000 (50,000) Year 5 50,000 Year 6 50,000 Year 7 50,000 Year 8 50,000 Cumulative 50, , , , , , , ,000 Tax Recovery 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Cumulative 15,000 30,000 45,000 60,000 75,000 90, , ,000 Net Cost 35,000 70, , , , ,000 95,000 80,000 IHT Exempt , , , , , ,000 Potential CGT Saved ,000 28,000 42,000 56,000 56,000

22 Pension Drawdown Strategy For Client Aged 73 Fund 500,000 Desired Drawing 50,000 p.a. Average/Higher Rate Tax 32.8% 40% PAYE payable in drawdown 16,400 20,000 Annual EIS Investment 54,666 66,666 22

23 Pension Case Cash Flow Pension Draw 50,000 50,000 50,000 50,000 50,000 50,000 PAYE thereon (16,400) (16,400) (16,400) (16,400) (16,400) (16,400) Net Pension 33,600 33,600 33,600 33,600 33,600 33,600 EIS Investment (54,666) (54,666) (54,666) (54,666) (54,666) (54,666) Net Cash outflow (21,066) Income Tax Recovery (16,400) (16,400) (16,400) (16,400) (16,400) Post tax cash flow (4,666) (4,666) (4,666) (4,666) (4,666) 23 EIS Maturity Proceeds Post maturity cash flow Cumulative Cash Flow ,666 54,666 (21,066) (4,666) (4,666) (4,666) 50,000 50,000 (21,066) (25,732) (30,398) (35,064) 14,936 64,936 EIS Investment 54, , , , , ,664

24 The Garden Suite 77 Mount Ephraim Tunbridge Wells Kent TN4 8BS Wellian Investment Solutions Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No This document is intended for professional advisers only. It is not intended to give personalised advice and you should contact us before taking any action based upon them. You should be aware that where past performance is quoted it is not a guide to future performance. 24