Last updated 05:11, Friday, 14 November 2008

Up until last April the normal rate of Capital Gains Tax (CGT) was 40 per cent. Now it is true that, for some, tax reliefs could lower the effective rate to as low as 10 per cent, but the majority paid tax at 40 per cent.

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We are now in a different regime where the rate for most Gains is 18 per cent. Unfortunately, this is of academic interest only to a great number of people as the credit crunch has hit both equity and property prices very hard.

Depending on your point of view, you may well be beginning to think that it is a good time to buy but, if you are paying CGT at 40 per cent for last year, then you may be feeling sore about that experience.

During better times the Government introduced a scheme intended for venture capital with some pretty attractive tax reliefs attached to it. This is the Enterprise Investment Scheme or EIS.

Investments into an EIS qualify for income tax relief of up to 20 per cent (for investments of up to £500,000) provided they are held for at least three years and any Capital Gains on the investments themselves are exempt from CGT with the same provisos. After two years they will also normally qualify for effective Inheritance Tax exemption. Now, those tax reliefs are certainly attractive but may not be enough to tempt most people into what can be relatively risky investments. What can tip the balance is the prospect of getting back some of the CGT that you have already paid for an earlier year.

This additional tax bonus comes because HM Revenue & Customs allows you to reduce the amount of Gains realised in the three years prior to your going into an EIS by the amount of your investment. In other words, you could be looking back at Capital Gains going back as far as November 2005 – well before the current crisis.

For this particular tax break you do not even have to own the shares for the full three years. Unfortunately, the Gain does not disappear for ever. It will come back into tax when the EIS is sold. Nevertheless, this is going to be at the new rate of 18 per cent at worst rather than the 40 per cent you probably paid in the past. Planning may even be able to reduce that further or possibly you may have made other losses during the current trough in prices.

The combination of the Income Tax and CGT reliefs will often amount to 60 per cent of the amount invested.

The tax reliefs are very attractive but please do remember that these are investments which should only be purchased after taking specific advice with reference to your own circumstances.

Many EIS investments are now designed so that asset backing minimises the risks involved but obviously they cannot be removed altogether.

If you require advice on any of the concerns covered in this article, please call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk