Actual net cash outlay 70 pence in the £1
If an EIS qualifying investment is held for at least three years from the date of issue of the shares, or three years from commencement of trade (if later) an individual (who holds no more than a 30% interest in the company) can reduce their income tax liability by up to 30% of the amount invested. There is no minimum subscription and the maximum investment in EIS qualifying companies which qualifies for EIS Income Tax Relief is £1 million in the current tax year. Income Tax Relief is offset in the appropriate year of claim, up to a maximum of the income tax liability. In other words, initial income tax relief could reduce your tax bill to nil.
Individuals may elect to treat their subscription for EIS shares as if made in the previous tax year, up to their maximum annual allowance, thereby effectively carrying income tax relief back one year. This assists an investor to maximise the relief available.
Income tax relief is available to individuals (counting husbands and wives separately) for the entire amount subscribed for eligible EIS qualifying company shares at 30%, to a maximum of £1m per tax year.
This relief is usually passed to the Investor in the form of a tax rebate or via an adjustment in PAYE code. The relief may only be claimed once the investor has received form EIS 3 from the company.
| Initial Investment | £ 100,000 |
|---|---|
| Less Income Tax Relief @ 30% | (£30,000) |
| Net Cost of Investment | £70,000 |
Investors may elect for subscriptions to be treated as made in the previous tax year, provided the total claim, with any amount already subscribed for the previous year has not exceeded the annual limit of £1m in any tax year. Thus an investor who had made no EIS investment in a tax year may make EIS subscriptions of up to £2m in the following tax year and elect to carry back £1m to the previous tax year to claim income tax relief.
No Capital Gain Tax to pay
No Capital Gains Tax is payable on disposal of shares after three years, or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares.
| Initial Investment | £ 100,000 |
|---|---|
| Less Income Tax Relief @ 30% | (£30,000) |
| Net Cash Outlay for Investment | £70,000 |
| Total Return | £90,000 |
| Tax free profit being gain of £60,000 and income tax relief of £30,000 | |
There is no CGT payable on gains in respect of Investments made in an EIS Company (on which EIS Income Tax Relief has been obtained and not withdrawn) where the Investments have been held until the later of three years from the date of subscription, or from the date of commencement of the EIS Company’s trade. EIS Income Tax relief must be granted on shares in order to qualify for CGT Relief on disposal. If full EIS Income Tax Relief is not retained, then partial CGT Relief on disposal may be available
Potential unlimited and indefinite deferral of an existing CGT bill
Capital Gains Tax on gains realised on different assets can be deferred if you invest your gain into EIS qualifying shares. In some circumstances the deferral will become indefinite. To receive this relief you must subscribe for EIS shares during the period one year before or three years after selling or disposing of your assets, i.e. gains made three years before or one year after the date of the EIS investment can be deferred. It is not necessary to claim EIS income tax relief to obtain deferral relief. Deferral relief is unlimited and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%.
There are various circumstances in which a chargeable event may occur relating to the deferred gain resulting in the gain becoming chargeable. Individuals and trustees should seek advice about the events which would trigger the withdrawal of relief.
| Initial Investment | £ 100,000 May 2014 |
|---|---|
| Less Income Tax Relief @ 30% | (£28,000) (Gain arose July 2012 on asset not eligible for Entrepreneurs’ Relief) |
| Net cash outlay for investment | £42,000 |
| Shares Sold August 2017 | £160,000 |
| Hypothetical Sale Value of Investment | |
| Chargeable gain | £0 – tax free if held for more than 3 years from issue or commencement of trade if later |
| Deferred gain from 2013/2014 becomes chargeable 2017/2018 | £100,000 |
| *Tax payable on deferred gain at 20% 28% on certain assets) |
(£20,000) If EIS income tax relief is not claimed or not available, there will also be capital gains tax of £16,800 payable on the gain on the investment. |
| Value of EIS deferral relief | Capital gains tax of £28,000 has therefore been deferred for a period of four years, and has also benefitted from a reduction in the general CGT rate, giving an absolute and a cash flow advantage |
*Assuming current rates apply and annual CGT exemptions already utilised.
Those considering deferring capital gains should take professional advice.
Where an individual has a capital gain on disposal of an asset within the three years before or one year after a subscription has been made for ordinary shares in an EIS company or fund, a claim may be made to defer that chargeable gain, or any part of it. The amount of the gains that may be deferred has no maximum and is limited only by the amount subscribed for eligible shares in an EIS qualifying company. Gains may be deferred until the EIS qualifying shares are disposed of or, if earlier, when other events trigger withdrawal of the deferral relief. Once the shares in the EIS Company have been sold, the deferred gain will fall back into charge to Capital Gains Tax in the year of disposal.
If the shares against which the gains are deferred are held until death, the deferred gain is never chargeable, so the deferral is indefinite.
NB In the examples that follow, it is assumed the investor is liable to capital gains tax (“CGT”) at the rate of 28%.
Maximum exposure 38.5 pence in the £1 for a 45% income tax payer
Relief is available for EIS shares which are disposed of at any time at a loss (after taking into account EIS income tax relief which is retained). The loss can be set against the investor’s capital gains, or his/her income in the year of disposal or the previous tax year. For losses offset against income, the net effect is to limit the investment exposure to as much as 38.5p in the £1, depending on the investor’s marginal rate of income tax, if the shares become totally worthless. Alternatively the losses can be relieved against capital gains at the prevailing rate of 20% for higher rate taxpayers(28% for certain assets).
The loss can be offset against income tax of the same year or the preceding tax year, or against capital gains of the same year or carried forward to be offset against future gains, subject to the normal treatment of CGT losses. Loss relief can reduce the investor’s exposure to 38.5% of the original investment if the investor elects to set off the loss against income tax due for the current year, and assuming the investor pays income tax at a marginal rate of 45%.
| Initial Investment | (£30,000) |
|---|---|
| Net Cash Outlay for Investment | £70,000 |
| If investment fell to £0 net loss | (£70,000) in 2015/16 |
| Loss relief against income at 45% | £ 31,500 |
| Net loss | (£38,500) |
| Percentage of original outlay | 38.5% |
If the loss is offset against capital gains tax, this can be claimed against capital gains of the same year, or carried forward and relieved against future capital gains. The current rate of capital gains tax is 20% for higher rate taxpayers (28% for certain assets).
| Initial Investment | £100,000 |
|---|---|
| Net Cash Outlay for Investment | £70,000 |
| * If investment fell to £0 net loss relief at 28% | (£19,600) |
| Less Income Tax Relief @ 30% | (£30,000) |
| Net loss | (£50,400) |
| Percentage of original outlay | 50.4% |
*Assumes sufficient gains against which to offset the loss.
Thus an individual who has income which is charged to income tax at higher rates is likely to wish to offset the loss against income rather than capital gain.
Where deferral relief only is claimed, loss relief against income may be limited by the cap on income tax reliefs. The loss relief, when aggregated with all other specified income tax reliefs, is limited to a maximum of £50,000 or, if greater, 25% of the taxpayer’s “adjusted total income” for the tax year
Professional advice should be sought.
Potential 40 pence in the £1 saving
Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes. Relief can be at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares.
| Initial Investment | Holding of cash | EIS investment |
|---|---|---|
| Cash | £100,000 | |
| Less income tax relief @ 30% | (£30,000) | |
| Net Cash Outlay for Investment | £70,000 | |
| Hypothetical value of cash | £105,000 | £30,000 |
| Hypothetical value of EIS investment | £160,000 | |
| IHT on cash balance | (£42,000) | (£12,000) |
| Value of estate | £63,000 | £178,000 |
If the shares have been held for at least two years before death, the investment should, in most cases qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% and with the other benefits of the EIS, the effective cost of investment may be greatly reduced.
The following table compares an EIS investment of £100,000 and the holding of cash of £100,000. It assumes that the investor’s inheritance tax nil rate band is already fully used
*IHT Relief above assumes the investment has been held for more than two years and is worth £160,000 at the date of death. IHT relief would be obtained at up to 40% of the value. Over the same period, the cash balance increases to £105,000.
There is no claw back of the income tax relief or deferral relief on death. Thus in this example, £160,000 of value passes to beneficiaries free of inheritance tax and the estate is also augmented by income tax and capital gains tax saved (there is of course no CGT on death anyway) by the deceased in this example
GrowthInvest is a trading name of EIS Platforms Limited. EIS Platforms Limited (FRN: 694945) is an appointed representative of Sapphire Capital Partners LLP (FRN:565716) which is authorised and regulated by the Financial Conduct Authority in the UK.
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