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Exceptional investment returns on renewable energy – here’s how

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Tuesday December 6, 2011 at 9:00am
Solar Energy will form an increasing part of the UK power supply over the coming years. This is especially true as a consequence of recent UK and European legislation which requires that 30% of UK electricity is provided from renewable sources such as solar and wind. As only 5.5% of power comes from such sources at present there is significant growth to be expected in the renewable energy sector.

In April last year the government introduced a 25 year feed-in tariff to encourage greater investment in renewable energy. This provides guaranteed inflation linked payments to companies that produce energy from renewable sources. Although these tariffs have now been reduced the direct costs of delivering renewable energy have also come down, thus making investment in the sector very attractive.

When this type of underlying investment is linked to the government Enterprise Investment Scheme (EIS) the benefits become exceptional. So what is EIS?

In order to promote economic growth and development the government creates an incentive for individuals to invest in smaller UK companies with generous tax relief.
EIS allows investors to access 30% tax relief on investment into qualifying companies which is given up front. Hence a £50,000 investment in EIS will actually cost £35,000 as tax will be repaid or not paid at all on income used for the investment. If the underlying investment achieves 5% growth then £52,500 will be repaid after 3 years (the minimum holding period for EIS investments to achieve relief without being clawed back).

This equates to a 50% return over 3 years. (£52,500 - £35,000 = £17,500 return on original investment of £ 35,000 being 50%). The beauty of such an investment is that the underlying return is low risk due to the guaranteed nature of the sale proceeds of the renewable energy generated. Incidentally maximum investment in Enterprise Investment Scheme is £500,000 per tax year. Capital Gains can also be deferred indefinitely by continual investment in EIS. You can even shelter gains made up to 3 years ago. All gains in EIS are tax free.

EIS investments are also free from Inheritance Tax after 2 years which is an excellent way of preserving family wealth especially if health is poor.

There are risks associated with EIS and so advice should be sought prior to making any investment. However, I think I’ve demonstrated that there are some very attractive and relatively low risk EIS investments around. If you are interested in tax advantaged investments such as EIS, VCT or even pension then give me a call.

Andy Parker
Chartered Financial Planner, Birmingham

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