Deferring the taxman: how EIS can help smooth your retirement

David Hole has over 30 years of experience as a qualified, professional financial advisor. In this time he has bought, developed and sold a business (Norris and Fisher Limited) and founded and sold another successful business (Inspire Financial Services Limited). As an accredited and insured money coach he gains huge personal fullfillment from using his expertise to help people achieve their financial goals.

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Understanding capital gains tax (CGT)

Selling a business is a momentous occasion, often marking the culmination of years of hard work. But the celebrations can be dampened by a looming capital gains tax (CGT) bill. This is where the Enterprise Investment Scheme (EIS) comes in, offering a tax-efficient way to defer that CGT burden and ease your transition into retirement.

When you sell your business, the profit you make is subject to CGT. While there are exemptions for a portion of the gain under Business Asset Disposal Relief (BADR), a significant chunk might still be taxable. This can create a cash flow crunch, impacting your retirement plans.

EIS: A strategic deferral tool

EIS are government-backed schemes designed to stimulate investment in early-stage, high- growth companies. They offer a range of tax reliefs for investors, including the ability to defer CGT. Here's how it works:

Deferral Window: You can reinvest the capital gain from selling your business into an EIS-qualifying company within one year before or three years after the sale. This effectively defers your CGT liability until you eventually sell your EIS shares.
Holding Period To qualify for CGT deferral, you need to hold the EIS shares for at least three years. This allows the company time to grow, potentially leading to a higher sale price when you eventually exit.

Benefits of Deferring CGT with EIS:

Deferring your CGT with EIS offers several advantages:

Improved Cash Flow: By delaying the tax payment, you free up significant capital for retirement. This money can be used to invest in income-generating assets, fund your desired lifestyle, or pay off debts.
Potential for Lower Tax Rate: CGT rates might change in the future. Deferring the tax allows you to potentially benefit from lower rates if they are introduced.
Spreading the Tax Burden: You can choose to sell your EIS shares gradually over time, spreading out your CGT liability across multiple tax years. This can be particularly beneficial if you anticipate being in a lower tax bracket later in retirement. Important Considerations:

While EIS offers attractive tax benefits, it's crucial to understand the inherent risks involved:

High-Risk Investments: Early-stage companies are inherently risky ventures. There's a chance you could lose all or part of your investment. This necessitates careful due diligence before committing funds.
Limited Liquidity: EIS shares are typically illiquid, meaning they can be difficult to sell on a secondary market. This means your capital is tied up for a longer period.
Investment Restrictions: There are various restrictions on EIS investments, including minimum investment amounts and income tax limitations. Consulting a financial advisor can help ensure you meet the eligibility criteria.

Maximising Your Advantage:

To make the most of EIS for CGT deferral, consider these strategies

Invest in a Diversified Portfolio: Don't put all your eggs in one basket. Spread your EIS investments across several companies to mitigate risk.
Seek Professional Guidance: A qualified financial advisor can help you evaluate your situation, identify suitable EIS opportunities, and ensure you comply with all regulations.
Long-Term Perspective: Approach EIS as a long-term investment strategy. While the three-year holding period allows for CGT deferral, aiming for a five to seven-year timeframe can potentially yield better returns.

Conclusion

EIS can be a powerful tool for business owners looking to defer CGT and navigate a smoother transition into retirement. However, careful consideration of the risks and a long- term investment approach are crucial for success. By working with a financial advisor, you can leverage the tax benefits of EIS while mitigating the risks and securing a comfortable and financially secure retirement.

To find out more about how the Access EIS Fund can work for you or your clients. Use the button below to schedule a call with our expert, Tom Britton.

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