Enterprise Investment Schemes (EISs) offer several tax benefits for higher earners. If you hold an EIS for three years you get 30 per cent tax relief to offset against your income tax bill. And selling the shares will not incur capital gains tax (CGT). If you die while holding EISs these will be free of inheritance tax (IHT), as long as you had held them for at least two years.
You can also offset any losses from an EIS against your CGT or income tax bill in the current or previous tax year. For example, if you put £20,000 into an EIS you would get £6,000 back as income tax relief. If the EIS investments subsequently went bust, you would face a loss of £14,000 – the net outlay after the income tax relief. But if you are a 40 per cent taxpayer you could claim loss relief of £5,600 – 40 per cent of £14,000 of the net loss – and a 45 per cent taxpayer could claim £6,300. So even in the worst-case scenario, higher and additional-rate taxpayers would receive total tax reliefs of £11,600 and £12,300, respectively, on the original £20,000 investment.
EISs can also be helpful if you have large CGT liabilities because of a disposal, for example, of shares or property. By reinvesting the proceeds in EISs you can defer gains made up to three years before and one year after the EIS investment.