There have been many changes affecting the personal investment industry over the last 20 years including a number of tax incentives to encourage wider investment provision by the individual for their own benefit. In today's environment, tax-efficient investments are more limited, in particular, those related to pension schemes. The EIS scheme is now the only UK tax efficient scheme to offer Capital Gains Tax ("CGT") Deferral Relief. With the changes to tax relief on pensions, investors may wish to consider alternative investments, such as EIS and VCTs, alongside their pensions.
The following table illustrates EIS tax benefits compared to other tax efficient investments, by way of illustration but please bear in mind these will depend on individual circumstances and the notes refer to the relevant section for each tax relief.
UK Tax-efficient Investment Comparison Table
|
|
VCT |
ISA |
Pension |
EIS |
|
Income Tax Relief |
30% |
Nil |
Up to 50% |
30% |
|
Capital Gains Deferral |
Nil |
Nil |
Nil |
Up to 28% (B) |
|
IHT Free |
No |
No |
Yes |
Yes |
|
Tax Free Exit |
Yes |
Yes |
Yes/No |
Yes/No (C) |
|
Tax Free Dividends |
Yes |
No |
N/A |
No |
|
Limits 2011/12 |
£200,000 |
£10,680 (D) |
Up to 100% of earnings or £50,000 (carry forward may also be available) (A) |
£500,000 (E) |
|
Min Holding Period |
5 years |
None |
To age 55+ |
2 years for IHT 3 years for EIS |
(A) With effect form 6 April 2011, the Annual Allowance ("AA") has been reduced to £50k, with the following features:
- The reduced AA applies to all i.e. there are no special restrictions for "high earners" (as there were in the 2009/10 and 2010/11 tax years)
- Within the AA, member contributions benefit from tax relief at the individual's marginal rate of tax, i.e. up to 50%
- Within the AA, relievable member contributions are limited to 100% of employment earnings.
- The reduction in the AA is, however, accompanied by a "Carry Forward" facility, allowing pension scheme members to Carry Forward the difference between £50k and the lesser level of total contributions made in the previous three tax years.
(B) Gains arising in 2011/12 to higher rate UK tax payers are chargeable at 28%. The rate of deferral relief was potentially as high as 40% for gains arising prior to 6 April 2008 reinvested within three years. Care is needed when considering deferring a gain because of changes in the CGT rate - deferral can result in additional tax being payable if the CGT rate is higher at the time the gain crystallises compared to when it arose.
(C) There is no tax free exit for shares for which EIS deferral relief only was claimed.
(D) Within this overall limit is an annual limit of £5,340 for the amount the ISA can hold as cash investments as opposed to stocks and shares.
(E) Up to £500,000 of investment may be carried back to the previous tax year if the limit for that year was not fully utilized.
For more information about EIS Funds and Portfolios please download the Factsheet for Professional Advisers here..
For more information about EIS Tax Reliefs please download the Tax Reliefs at Work Factsheet here..