Get cash out of your company as-you-go… at Entrepreneurs Relief Rates

There are two HMRC approved Investor Reliefs that help you get cash out of your company at roughly Entrepreneurs Relief rates… year after year after year

That’s right… you get to turn company assets (excess cash) into personal assets at ER (Entrepreneurs Relief) tax rates of 10%… as you go… no waiting for the Holy Grail company sale…

… and for those of you who’ll never sell…

… there’s no reason to be jealous of the 10% ER tax rate you’re missing out on … EIS and VCT investments can help you get the same effective rate… right now…

… let’s use a quick example using EIS investments to show you how you can use EIS to get ER rates…

Year one … now !

           Step one : you take £100,00 out of your company… suffering roughly 38% tax …

         Step two : you put that money in an EIS investment… costing about 3% in fees

  Step three : you claim 30% tax relief back from HMRC for investing in EIS

Total cost 38% tax suffered on Divs + 3% EIS fees LESS 30% Income Tax relief = 11%

You’ve taken £100k from the company and turned it into a personal investment for roughly Entrepreneurs Relief rates of 10%

To hold onto the relief you must hold onto the investments for at least 3 years…

And then it gets really interesting…

Repeat this year on year… (year two, year three)… until…

Year Four…

                             Step one : sell the original EIS investment of £100k you made in Year One… any gains will be tax free (any losses claimed against income tax)…

              Step two : invest the proceeds in another EIS investment… costing 3%…

                   Step three : claim the Income Tax relief of 30% (on the same £100k)… again

                                Step four : take £100k cash from your company… pay tax at 38%… & put the cash in your own bank

You have now got a £100k EIS investment…. AND the £100k cash in your personal pocket had been put there for the princely cost of 11% (38% div tax plus 3% fees less 30% tax relief)

And from year 4 onwards you can do that every year…

…. and if you did… by year 7 you’ve had 3 lots of 30% of tax relief (£90k)  on the original £100k you put into the first EIS…

Traditionally these investor reliefs were seen as just for people who’d maxed out their pension and ISA contributions…

… not true …

… or not true enough…

As I’ve shown… they can be used as part of a very tax efficient cash extraction strategy…

EIS & VCTs.. what are they?

You can go direct to HMRCs site to check out these reliefs... so instead of giving you lots of stuff you can read there… here’s a guide to some of the key differences between VCTs and EIS investments:

Max Investment pa

EIS investors can invest £1m per year … that’s up to £300k tax relief if you have paid enough income tax to cover the refund !

(the limit rises to £2m if at least £1m is invested in knowledge-intensive companies)…

…. and you can go back one tax year too

VCTs the limit is just £200k.. (and no going back one year)

Investment Returns

Any dividends paid to you by EIS company’s are taxed as normal…

From VCT company’s they’re tax free

(both are tax free for Capital Gains Tax)

Other Taxes

EIS investments avoid IHT (Inheritance tax) when held for more than two years (because they’re eligible for Business Relief)

VCTs don’t

EIS allows you to defer Capital Gains Taxes from the sale of other assets

VCTs don’t

Holding Period

EIS investments have to be held for at least 3 years

VCTs it’s 5

How Owned?

EIS investments can be single company investments… or ‘placed’ in a ‘portfolio’ so as to spread risk

VCTs are delivered in a fund structure, and typically invest your money in a lot more companies than an EIS portfolio to spread the risk even further

How Sold?

EIS investments are realised on an individual company basis (so… a company goes through an MBO, share buyback, investor replacement sale, outright company sale)

VCTs are listed on stock markets, so theoretically they’re more liquid that EIS… but there’s no guarantee there will be buyers…  (because there are no tax breaks on buying existing VCT shares… and the shares tend to trade at below the company’s net asset value because of this)

For those who like their info in picture form… here’s the HMRC tables