If you pay UK income tax, you probably didn’t realise that there is a much better use for your hard-earned money than lining the tax-man’s pockets. EIS is a government scheme designed to encourage investment into high-growth startups, by removing a whole lot of the risk from investing and also by adding extra returns on top. That means you have an unbeatable risk/reward combination that doesn’t exist anywhere else in the world – and it certainly beats paying tax!
First Off: 30%
Let us quickly show you the benefits in a worked example, using a worst-case / best-case comparison. Suppose you are planning to invest £10,000 in a company with EIS Advance Assurance. The first bit of good news is that you can immediately take 30% of the investment value (£3,000) off your income tax, either for the current tax year or the previous one. So really you have just paid £7,000 for £10,000 of shares. Very nice work!
Worst case: Losses Under Half
Suppose things don’t go to plan and a year later the company goes out of business. Those shares are worth nothing now… except that you can actually claim the additionally lost value against your income. Since you’ve already claimed 30% this means you can claim the remaining 70% against your income. Assuming you’re paying the 40% tax rate, you’ve paid £10,000 for shares, received a total of £5,800 in tax credits, resulting in a net loss of just £4,200! (Higher-rate taxpayers only lose 38.5%). For a worst case scenario that’s really good.
Best case: Far Better ROI
Now suppose instead that things go to plan and your shares are now worth 10x what they were – £100,000. Normally you’d have to pay 20% capital gains tax on that, so your profit would be £72,000 = 80% * (100,000 – 10,000). You invested £10,000 so your ROI – return on investment – is 720%. That sounds great until you compare it to EIS, where your returns are £93,000 and your ROI is an eye-watering 1,329%.
Let’s recap. In the worst case you’ve lost 42% of what you invested. The stock market is not nearly so forgiving! But in the best case you’ll get way better returns, on what is already a great investment.
EIS is probably the best investment scheme in the world right now.
Now you need to find a few potential investments, ideally companies with EIS Advance Assurance and an excellent chance of big returns. Nous is currently fund-raising in an EIS round – we have a strong team, proven traction, a consumer-friendly, defensible product, and potential for a 30x increase in company valuation over the next 5 years. (As you can see from our handy-dandy EIS calculator that is a risk:reward ratio of over 48x!). Go forth and multiply, friends!
Remember that you should only invest as part of a diversified portfolio and that your capital is at risk. The availability of EIS tax relief depends on the individual circumstances of each investor and may be subject to change in the future. You should obtain independent tax advice before proceeding with your investment.