As a high-tax payer you might be reaching out to your local Accountants in London to help you out with reducing your income tax bill. Out of many ways, one way of being tax efficient and getting a financial return at the same time is by-investing into high growth SMEs.
This approach allows a number of ways for investors to invest tax efficiently while mitigating some of the risk through the use of tax efficient incentives and reliefs. This strategy also allows a greater upside benefit, especially when the return is compared to the net investment outlay.
There are many tax-relief schemes out there to make this activity more attractive for you as per your goals, benefits and options to suit your priorities and personal circumstances. To make the task easier for you, Taj Accountants has come up with 5 investment relief choices that can help you make the right decision.
1. Entrepreneurs’ Relief (ER)
Entrepreneurs’ Relief (ER) is a Capital Gains Tax relief available for individuals, not companies. It reduces the rate of tax paid on the disposal of business assets where the disposal proceeds are high enough to take you into the higher tax bands. It reduces the Capital Gains Tax on qualifying business disposals to 10%, while the business is running for 2 years and owns 5% of the shares with voting rights.
It applies to qualifying disposals of business assets; not investments, non-business assets or carried interest gains. There is a lifetime cap of £ 1 million for Entrepreneurs’ Relief that has been applicable from 11th March 2020. If you think this is the most appropriate tax-relief option for you, then can contact and learn more about your eligibility from Small Business Accountants in London.
2. Investor’s Relief (IR)
Investor’s Relief (IR) is also a Capital Gains Tax relief available to individual investors. This relief applies to gains made on the disposal of investments in ordinary shares. It reduces the Capital Gains Tax on the disposal of investments of ordinary shares to 10%, only if the share investments were made on or after 17 March 2016 on disposals carried out after 6th April 2019 and held for at least 3 years.
To be eligible, the investee company must be trading or the holding company of a trading group, and the shares must have been subscribed for in cash. The relief is subject to a lifetime cap of £10 million. The £10 million cap for Investors relief is in addition to the £1 million (£10 million to 11 March 2020) lifetime cap for ER.
Investor’s Relief differs from Entrepreneurs’ Relief at the point that Investor s Relief is intended for investors who are not actively involved in the business. Also, there isn’t a minimum requirement for what percentage of shares you must own to avail this relief.
3. Individual Savings Accounts (ISAs)
Individual Savings Accounts, or ISAs is a class of retail investment arrangement available to residents of the UK, introduced in 1999. It is one of the most widely recognized investment methods in the UK. ISA now accounts for a family of products that are available to all savers in the UK and allow them to benefit from a number of reliefs. The main difference between an ISA and any other savings account is that- ISA offers tax-free interest payments where you could get more for your money. You can invest up to £20,000 a year without paying tax on the investments with an ISA.
In a year, you can only have one ‘active’ cash ISA, and benefit from the tax-free savings allowance in every one of these cash ISAs. But you can split your allowance between several cash ISA products. Meaning, you can open two or three Nationwide cash ISAs and, as long as you don’t exceed your annual ISA allowance in the total deposits you put in across all of them, you can use them all.
5. Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is the first of the Venture Capital Schemes created as the successor to the Business Expansion Scheme in 1994. The scheme gives tax incentives to individual investors who buy new shares in small, unquoted companies. These tax incentives can come in the form of Income Tax Relief and Capital Gains Tax relief for investors.
As an investor, you can get Income Tax Reliefs up to 30% on the cost of shares for the year in which you made the investment. You can make a maximum investment of £1 million. Through EIS relief, you can even possibly reduce your tax liability to zero. If you hold onto your shares for a minimum of three years, and if your Income Tax Relief has been given and not withdrawn, then no Capital Gains Tax will be charged on the gain of disposal. Capital Gains Tax (CGT) can be deferred if the proceeds are invested in EIS shares.
6. Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) is another Venture Capital Scheme which was introduced before the Enterprise Investment Scheme. SEIS was launched in 2012 to cater for the earliest of all businesses seeking investment. This scheme gives tax incentives to individual investors who buy shares in new companies, issued on or after 6th April 2012. Just like EIS, these tax incentives can be in the form of Income Tax Relief and Capital Gains Tax relief for investors.
As an investor, you can get Income Tax Relief up to 50% and the reinvestment relief that allows investors to reclaim 50% relief on a reinvested gain. You can make a maximum investment of £100,000. If you hold on to your shares for a minimum of three years, and if your Income Tax Relief has been given and not withdrawn, then no Capital Gains Tax will be charged on the gain of disposal.
Related Blog: Learn more from our guide to The Diverse Aspects of EIS and SEIS.
These investments have their own functionalities and benefits which might fit for you or not based on your own preferences and priorities. You have a wide range of choice, so take time and choose what suits you the most. Get consultation from your trusted London Accountants to help you out in case you’re confused and you need help with your taxation issues.
How can we assist you?
At Taj Accountants, we work with tax returns for individuals, self-employed and companies. Our specialized Small Business Accountant firm works with top-notch software approved by the HMRC and Companies House, ensuring your total compliance with current regulations. Our team of expert accountants keeps your obligations updated, and helps you save tax by making sure you are taking advantage of all potential benefits to minimize your tax. Feel free to contact us to guide you through each scheme and solve your accounting and taxation problems.
DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you to contact Taj Accountants for further assistance.