Large corporation share values have fallen dramatically! Capital invested in a small, well-managed trading firm can be a profitable asset; especially E.I.S. shares.
HMRC Enterprise Investment Scheme approval status transforms a business into a compelling share purchase for people who pay too much tax. 42.85% total return on investment is generated by virtue of tax relief alone; equivalent to 12.62% p/a annualised compound return when shares are sold at the same price after 3 years.
Investors should favour firms with a credible investor exit strategy. For instance, a Staff Share Purchase Plan whereby employees' pay is linked to dividend value.
There are no management fees to pay on Enterprise Investment Scheme shares. Fund managers often charge 5% on Stock Market investments. Additionally, annual management fees of around 1.5 per cent are not uncommon. These costs quickly erode your capital; especially now, as inflation is running at a high level.
Fund 'supermarkets' have taken to adding extra charges to justify those offerings which don't pay them commissions. This means it costs you more to hold a small sum in tracker funds; typically .5% per year of your total capital invested. Flat-rate fees of £1 or even £2 a share per month hit small scale investors even harder.
The Financial Services Authority is banning 'trail commissions' from 2013 onwards. This will likely lead to hefty up-front fees for financial advice provided by an IFA.
Dividend re-investment can create charges when transacted by fund managers. Even online internet share trading costs you commission of up to £13 per deal.
Watch out for 'performance fees'...a financial sting in the brokerage tail. When your investment achieves a capital gain, brokers take a high % charge for their advice.
Investors see tax rebates from EIS as better than relief on pension contributions which are limited to £50,000 for 50% taxpayers. The immediate refund of Income Tax generated by an EIS investment can be switched to a pension contribution.
EIS shares should be kept for 3 years to retain all the tax advantages, then sold.
The redeemed investment can then be recycled into the same or another Scheme.
Tax-free gains from successful EIS investments can be transferred into pensions.
An increase in the value of Enterprise Investment Scheme share value is free of Capital Gains Tax...but any loss can be offset against future Income Tax or CGT.