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The Lesser-known Benefits of EIS Investing*

Most investors know very well the income tax relief and tax-free growth elements of investing EIS (Enterprise Investment Scheme) qualifying companies. Investors can claim up to 30% income tax relief on EIS investments up £1 million per tax year (provided the shares are held for at least 3 years) and when EIS-qualifying shares are sold, any growth in the value from an investment is 100% free from capital gains tax (again, provided the shares are held for at least 3 years). The loss relief is also commonly understood. If EIS shares are sold for less than the amount invested (net of income tax relief), loss relief is available. It allows an investor to offset the loss against either their capital gains or income.

As an EIS qualifying fund, Kappika's Fund I will at least allow 30% income tax relief and this may be as much as 50% given that most investments could qualify under SEIS (Seed EIS).

Less well known are;

  1. Capital gains deferral

  2. Inheritance tax relief

Capital gains deferral allows a gain made on the sale of other assets to be reinvested in EIS-qualifying shares and deferred over the life of the investment. There’s no upper limit!

EIS-qualifying shares can also qualify for Business Property Relief (BPR). This means they can be left to beneficiaries free from inheritance tax, provided they have been held for at least two years.

To understand this a little better let's take a look at a personal example...

  1. £100k is invested in an exciting start-up business i.e. £100k worth of shares purchased

  2. The investor receives £30k of income tax relief

  3. The investor receives £14k CGT relief (based on £100k gain from property sale)

  4. Sadly, the company goes bust! Total Share loss of £100k which gives rise to a £70k loss relief claim netting a £28k tax rebate

  5. So in this worse case scenario the invest or has £28k total cost of the EIS loss or 28%.

Two quick final points worthy of note... 1) By investing in a fund the investor would have spread their £100k invested over many companies and hence diluted their risk compared to this singly company investment. 2) Kappika will likely be closer to 50% income tax relief.

*The EIS tax reliefs, rates of tax, and tax allowances referenced depend on personal circumstances and are based on current legislation. Tax rules may change. Tax reliefs depend on EIS qualifying companies maintaining qualifying status. Please consult your IFA or wealth advisor.

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