Financial Planners Elite

Directory of the Leading UK Financial Advisers

Ray Prince: Can You Get Your Income Tax Refunded? - The EISy Option

21 Jan 2014 8:31 AM | Margaret George (Administrator)

Can You Get Your Income Tax Refunded? - The EISy Option
By Ray Prince

It's only being human to feel that it would be great to be able to somehow get some of the considerable amounts of income tax we paid back to us.

In the past, investors have been encouraged to fund more pensions because of the lure of getting tax relief and many doctors and dentists paying higher rate tax have taken advantage of this option.

Many were not aware of the downsides of course, such as, in some cases, having to pay higher rate tax when they took their pension benefits and having little control over their options.

Now there are extra barriers, namely the limit of how much you can have in pensions, called the Lifetime Allowance, being reduced yet again to 1.25m from next April.

This brings most long serving NHS doctors and dentists earning even modest salaries within range of this limit. As you will no doubt be aware, anything over this limit is then subject to an additional tax charge.

So if investing in more pension is now not a viable option, are there any other ways of getting some of your income tax back?

In the past various suspect schemes abounded in the 90s and into the 2000s. We stayed well clear of these as there is no point in trying to get back some of your hard earned money if the scheme simply does not work (and is investigated and disallowed by HMRC).

You would also probably not want the tax man to be taking an extra interest in your finances because you invested in a suspect scheme.

Equally, there are valid schemes available that do enable you to legitimately claim income tax back, however are high risk to the extent that the capital you invested could well be depleted.

So you would actually end up losing money overall, even taking into account any tax reclaimed.

This is an area we are constantly keeping a close eye on as we know some clients are interested and that certain schemes do now have a track record of success going back, in some cases, eight years.

These schemes are called Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT), and are actively encouraged by the government and backed with a scheme certificate by HMRC.

The reason for this is that a typical company that gets qualifying status is a 'start up' - for example to quote HMRC:

"The Enterprise Investment Scheme (EIS) is designed to help smaller higher- risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies."

So far so good on the legitimacy - you will get your tax credit.

This is at 30p in the pound, meaning a 100k investment would give you a tax credit of 30k, typically sent to you by HMRC 6 to 12 months after investing.

It should be noted that you cannot reclaim more income tax than you have paid!

The rule is that if you invested in this tax year, the revenue would allow you to reclaim what tax you will pay in this and what you have paid in the last tax year.

The next aspect we would want to see, bearing in mind that many investors view an EIS as primarily a tax planning exercise rather than an investment, is the timescale.

Surely short term is preferable, as once your tax is repaid to you, you will want your invested capital back as soon as possible.

So an EIS timescale of just over 3 years is preferable in our opinion to a VCT with 5 years plus. It should be noted that some schemes are open ended, and we would suggest avoiding these.

Then we come to the actual investment itself.

Clearly, investing in any start-up company is going to be riskier than an established one. Hence the government tax incentive.

HMRC rules say it must be a trading company, and renewable energy companies have attracted a lot of attention including Solar Energy.

Other increasingly popular choices are based on Broadcasting and the Media, as many of the successful EIS investments over the last eight years or so testify.

TV programmers are very content hungry apparently, and here is a list of programmes and films you may recognise that have been funded by small investors via an EIS:

Doc Martin
Foyle's War
Have I Got News for You
Life of Pi

One EIS company has stated that of the EISs that they offer, over 90 schemes have already returned money to investors, with none failing to return less than 95p in the pound.

Other benefits that may appeal to investors are;

Deferral of Capital Gains Tax - allows the gains made elsewhere on an investment to remain deferred for the life of the EIS investment
Loss relief - can be used above and beyond the income tax relief granted
If held for the full three years, there is no CGT on the sale of the EIS shares
Business Property Relief - available after two years of investment; meaning that the money, if held until death, falls outside of the owner's estate on death. This can help with inheritance tax planning

So who would be a typical investor for an EIS?

It would normally be someone who has existing stocks & shares investments and have used their ISA allowances, and/or a property portfolio, who is looking for something even more tax efficient.

Also, many doctors and dentists now operate via their own limited companies and because any withdrawals over and above the higher rate tax threshold are likely to be taxable, it's often the case that substantial amounts of cash can build within the company.

This could mean that HMRC would view their company as an investment company not a trading company, leading to possible loss of Entrepreneurs' Relief, which would mean that a higher rate of CGT would be due when the business is sold (28% vs 10%).

Another negative is that where money is retained within the company's bank account it invariably receives a very poor rate of interest (in line with most bank/savings accounts currently).

So the idea of formulating a plan where they invest in an EIS, get their tax credit to compensate for paying tax on taking the money out of the limited company, and then can use this money as they see fit after 3 years, is attractive to many.

Some investors are also getting their money back after 3 years, and then immediately reinvesting, creating a rolling series of schemes.

In Summary

Tax benefits are indeed attractive, however these alone should not be the only reason to invest in an EIS.

This type of investment is high risk, and should not form a large proportion of an investor's portfolio.

Existing mainstream tax efficient investments such as ISAs should be considered first.

Key Considerations

The EIS route can be a very tax efficient way to invest over the short term and some companies have now built up a track record over several years.

But, as ever, make sure you consider the risks within the context of your overall situation.

Action Point

If investing through an EIS is attractive to you, then ensure you read up on all the pros & cons.

Ray Prince is a fee based Certified Financial Planner with Rutherford Wilkinson ltd, and helps UK Resident Doctors and Dentists plan to achieve their financial objectives. Just visit where you can request your free retirement planning guide.

Rutherford Wilkinson ltd is authorised and regulated by the Financial Conduct Authority.

Article Source: [] Can You Get Your Income Tax Refunded? - The EISy Option

© Financial Planners Elite
Powered by Wild Apricot Membership Software