Entrepreneurs Saving for Retirement Must Know About EIS Tax Relief

4 Mins read
  • All shrewd entrepreneurs should take advantage of the best tax relief opportunities when trying to save for retirement.

There are many things that you must do as a business owner. Your responsibilities include monitoring your cash flow, ensuring your employees are upholding their duties and marketing campaigns are properly executed.

With all of the time and effort that you have to invest in running your business, it can be easy to overlook some of the responsibilities that you must comply with the rest of the time. You might forget that you need to invest wisely to save enough money for retirement or start your own pension.

The good news is that there are new ways to improve the ROI of your investing strategies. This is critical for any entrepreneur trying to raise money for retirement, because they are going to have to be responsible for their own retirement savings. They don’t have the benefit of getting a retirement plan through their employer.

You are able to take advantage of some new laws that help investors save on their taxes. The Enterprise Investment Scheme is a perfect example.

Using The Enterprise Investment Scheme as an Entrepreneur Saving for Retirement

In the UK, 77 new companies or “startups” are founded every hour. 20% of these companies will go bankrupt by the end of their first year. By the third year, 60%. It’s a risky business. It’s also not a very encouraging statistic for investors to spend their money on these younger companies. But is there really no way for investors to benefit through these smaller companies?

In 1994, the UK government made The Enterprise Investment Scheme (EIS) available to benefit both young and small businesses, as well as investors. Through this scheme, smaller businesses with higher business risks are able to gain funding through investors, therefore avoiding bankruptcy. And the investors? Well, they’d get a pretty generous tax relief from the governments EIS Tax Relief.

You will want to keep this in mind if you are an entrepreneur trying to save for retirement. You might be able to get a higher ROI on your investments if you want to get a stake in other small companies.

What is the EIS Tax Relief?

The EIS Tax Relief is a 30% relief on taxes given to investors who put their money in small, young businesses. So, let’s say you invest £50,000 in a small company. You would automatically receive £15,000 in EIS Tax Relief.

Through the EIS Tax Relief, you’d also get exemptions on inheritance tax (for shares held for a minimum of two years), and capital gains tax.

In a year, a single investor is able to claim, at most, £1m of relief from their investments in qualifying companies. But if they are investing their money in knowledge-intensive businesses (like in health services or life sciences), then the cap increases to £2m. Investors must hold their shares for a minimum of three years.

Taking advantage of tax relief opportunities is very important when investing. It can be just as important as following the right technical analysis factors.

How does the EIS Tax Relief benefit investors?

The tax relief provided by the EIS Scheme means that investing in smaller companies would be a less risky ordeal. Let’s say the small company you invested in managed to break even that year, then the 30% tax relief (£15,000) would be the net profit. And if the company doubles in value, that profit rises to a whooping £65,000!

But what if the business fails? Wouldn’t you lose most of the money, anyway? Well, that’s what the loss relief is for, which the EIS Scheme also provides. The loss relief is anywhere from 20% to 45% of the investment you made. So, assuming the loss relief is at 45%, you’d also get £22,500, on top of the EIS Tax Relief. This amounts to a total of £37,500 — which means you only lost £12,500. It’s only a quarter of your initial investment.

Which investors are qualified for the EIS Tax Relief?

Investors who are not connected to the investee company by employment or financial interests are qualified for the EIS Tax Relief. This means you cannot be employed in the company, or be a partner, or a director. An exception is made for unpaid directors, who are still qualified to apply for the EIS Income Tax Relief. These prerequisites must hold true starting from two years before the shares were issued, up to three years after initial investments were made.

If the investor also has 30% or more interest in the company or any of its subsidiaries (such as voting rights, share capital, or rights to assets), they are unqualified for the EIS Tax Relief.

How can investors claim their EIS Tax Relief?

Investors can claim their EIS Tax Relief by providing HM Revenue and Customs (HMRC) with this information:

  • List of names of the companies they have invested in
  • The tax relief amounts they are claiming, per company
  • Exact date of when shares were issued (not the date of investment)
  • Official HMRC Office authorization of the EIS3 certificate, alongside its reference

Take Advantage of Tax Relief Opportunities as a Business Owner Saving for Retirement

As a business owner, you are going to need to save wisely to be able to afford to retire. You might be considering investing in small startups like your own to grow your nest egg. While investing in startups is notorious for being risky, the EIS Tax Relief and the subsequent loss relief provided by the UK government means that investors must think twice before giving a pass to smaller companies. Through the many reliefs, any losses made would be significantly lower than the initial investments, while the gain will stay much higher. This can be the best way for entrepreneurs to grow their nest egg as they plan for their golden years.

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About author
Jessica Barden is the writer of this post ans associated with Essay Writing Service. She is an Ambitious Entrepreneur, Public Speaker, and a Blogger. Her blogs shed light on current business trends, marketing practices, and entrepreneurial matters. Personally, she likes to read books and attending seminars.
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