David’s situation
David has more capital than he expects to need for his lifetime, and decides to start drawing down from his pension. He wants to immediately draw 25% of his pension to benefit from the income tax free lump sum available to him. He would like to start to make some lifetime gifts to his children, but doesn’t want to give away too much of his wealth while alive.
He tells his adviser that he would like to make some more interesting investments with his capital. He is happy to consider less liquid and higher risk options with this money, as he was not originally planning to access this capital during his lifetime.
His adviser reminds him that funds drawn from his pension beyond the tax free lump sum will be subject to income tax at his marginal rate, as will any interest or dividends the capital released from the pension earns outside of the pension wrapper.
A solution designed by the Government for retail investors
His adviser explains the Enterprise Investment Scheme (EIS). EIS is a route the Government designed more than 30 years ago to help individual investors access unquoted companies with high growth potential.
Qualifying investments are made into the shares of exciting early stage, unquoted UK businesses which have the potential to achieve significant growth, but where due to the early stage in the company’s journey, the risk of failure is also material.
To encourage investment and reflect the risks, investors benefit from a generous range of tax reliefs, which in effect reduce the cost of investment, and boost post tax returns from successful investments.
How it works:
- Money is invested into the shares of qualifying companies, to support the business during its early years as it seeks growth. An exit is provided if and when the company reaches a major milestone, such as a sale or listing on a stock exchange. In this way, investors are exposed to the potential for significant capital growth over the exciting early years of a company’s life. This is typically a period of 5-10 years.
- On investment, 30% of the amount invested can be reclaimed against income tax paid in respect of the year of investment, or the previous year. So for a £10,000 investment, £3,000 can be reclaimed.
- In the future, if a successful exit for investors is achieved, the growth in value will be completely free from capital gains tax. With EIS qualifying investments having the potential to grow to be worth multiples of their initial value, receiving proceeds free from 24% Capital Gains Tax (current rate) can result in a significant boost to post-tax returns.
- And if a company fails, investors are entitled to claim tax relief in respect of the loss suffered (after taking the benefit of income tax relief into account).
- Shares also qualify for Business Relief from IHT. From April 2026, everyone has a £1 million Business Relief Allowance. Qualifying shares worth up to £1 million can be left free from IHT, saving 40% provided they have been held for at least 2 years when the investor dies. Investments in excess of £1 million benefit from an effective 20% IHT saving.
Investors typically create a portfolio of EIS investments, either by self-selecting individual qualifying companies, or by investing in a portfolio designed by a specialist manager with skills and experience in this sector. Investors benefit from tax relief when any individual portfolio company fails, no matter how well their portfolio is performing overall. This is incredibly powerful. It means that investors typically consider the maximum amount of capital at risk is only 39p of every £ invested.
An example outcome for David
EIS sounds like a good solution to David and he is keen to consider investing all of the £250,000 tax free lump sum he will withdraw from his pension. He thinks a portfolio of EIS investments will align well with his goal of investing in exciting growth opportunities using some of the capital he expected to leave to his children. He plans to draw down another £250,000 from his pension to gift to his children immediately.
David’s adviser shows the tax position if David makes an EIS investment compared to doing nothing, to show how the tax saved can mitigate some of the investment risk.
Net inheritance for beneficiaries if no action is taken:
|
Pension |
House and investments |
Total |
| Value at death |
£1,000,000 |
£2,000,000 |
£3,000,000 |
| Nil Rate Band |
-£216,667 |
-£433,333 |
-£650,000 |
| Residence Nil Rate Band |
|
– |
– |
| IHT at 40% |
-313,333 |
-626,667 |
-940,000 |
| Amount inherited |
686,667 |
1,373,333 |
2,060,000 |
| Income tax at 45% when drawn |
-309,000 |
– |
-309,000 |
| Value inherited |
377,667 |
1,373,333 |
1,751,000 |
David can draw down £250,000 from his pension tax free, and will then pay income tax at 45% on the further £250,000 drawdown, resulting in an income tax bill of £112,500. He wanted to make a large lifetime gift to his children, in the hope he survives 7 years in order to benefit from IHT exemption on the amount gifted.
He invests £250,000 into EIS, generating £75,000 of income tax relief which he can offset against the drawdown bill, reducing the net tax cost of the withdrawal to £37,500 and enabling £212,500 to be gifted to his children.
Ignoring any growth or loss in value of David’s assets, and also ignoring any further withdrawals of capital he might make to fund his lifestyle, David’s adviser shows him how EIS tax reliefs could support his plan to invest in earlier stage companies and also make a large lifetime gift to his children.
|
Pension |
House and investments |
EIS |
Cash gift |
Total |
| Value at death |
500,000 |
2,000,000 |
250,000 |
|
2,750,000 |
| Business Relief |
|
|
-250,000 |
|
-250,000 |
| Taxable estate |
500,000 |
2,000,000 |
0 |
|
2,500,000 |
| Nil Rate Band |
– 130,000 |
– 520,000 |
|
|
-650,000 |
| Residence Nil Rate Band |
|
– |
|
|
|
| IHT at 40% |
-148,000 |
-592,000 |
– |
|
-740,000 |
| Amount inherited |
352,000 |
1,408,000 |
250,000 |
212,500 |
2,222,500 |
| Income tax at 45% when drawn |
-158,400 |
– |
0 |
0 |
-158,400 |
| Value inherited |
193,600 |
1,408,000 |
250,000 |
212,500 |
2,064,100 |
He explains that investments have to be held for at least 3 years in order for EIS relief claimed to be retained. As David is comfortable with the idea that these investments may be passed to the next generation, the fact they need to be held for a set period and have no natural liquidity was not off putting.
The investments described in this website will place your capital at risk. Past performance may not be repeated and is not indicative of future results. Tax reliefs are dependent on investors’ individual circumstance and are subject to change. An investment in a fund managed by Parkwalk must be made only on the basis of the fund’s Information Memorandum and Key Information Document. Parkwalk does not provide investment or tax advice, and the information on this website should not be construed as such.
