In this article we’ll be exploring some efficient tax relief schemes, Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
Overview of Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (‘EIS’) is there to encourage individuals to subscribe for shares in unquoted companies carrying on a qualifying trade. It provides tax benefits for such investments made by qualifying investors, that includes:-
- 30% income tax relief on the subscription
- Exemption from any gain on the qualifying shares after a holding period of 3 years
- The ability to defer any capital gains into the EIS investment
- Relief for any capital loss If a loss arises on the disposal of the EIS investment
A qualifying investor is broadly an individual who has not previously been connected with, and who does not become connected with the company, within a specified period – so the reliefs do not apply to owner managed businesses in relation to their own businesses but there are some exemptions for “Business Angels”.
The company an individual is investing in has to meet certain conditions, but broadly is an unquoted trading company with gross assets less than £15m. There are certain trades that do not qualify which are mainly property based / banking and finance companies.
The rules are quite complex so individual advice should be sought before making any investment to ensure your individual circumstances are taken account of.
Using EIS to Pay 20% Capital Gains Tax Instead of 28% On The Sale Of Property!
Capital Gains Tax (CGT) on the sale of residential property is paid at 28%, whereas the CGT rate on the sale of all other assets is at 20% – by making use of the CGT deferral available on EIS investments, it is possible to bring the rate of tax on a residential property down to 20%.
This tax planning opportunity arises because reinvesting the property gain in Enterprise Investment Scheme (EIS) company shares defers the gain until the shares are sold when the gain comes back into charge at the general rate of CGT, currently 20% for a higher rate taxpayer.
There is no minimum holding period for EIS deferral relief, however where the investor is seeking income tax relief and CGT exemption on the sale of the EIS shares they need to be an unconnected investor and retain the EIS shares for at least 3 years. The reinvestment in EIS shares must take place during the period of 12 months before to 36 months after the date of disposal of the property. Let’s look at an example: –
‘C’ sells a buy-to-let property in December 2018 for £300,000 making a capital gain of £100,000. ‘C’ reinvests the £100,000 gain in shares in a qualifying EIS company with which he has no connection in January 2019. The £100,000 gain would be deferred until the EIS shares are sold and the £28,000 CGT liability for 2018/19 would not need to be paid.
As an unconnected investor ‘C’ will be able to deduct £30,000 (30%) from his 2018/19 income tax liability if he retains the shares for 3 years. The net cost of the EIS shares is thus £70,000. ‘C’ decides to sell the EIS company shares in February 2022 for £105,000. The £5,000 gain on the EIS company shares would be exempt from CGT and under the current rules the £100,000 deferred gain comes back into charge at the general rate 20%, so just £20,000 of CGT is payable.
Seed EIS (SEIS)
Seed EIS has similar rules to EIS but provides a 50 per cent income tax relief on investments in small early stage companies. SEIS income tax relief is available in respect of investments in shares in new (two years old or less) smaller companies (those with 25 or fewer employees and assets of up to £200,000). The company must be carrying on, or preparing to carry on, a new business in a qualifying trade, and must not have previously raised money under the EIS or VCT (venture capital trust) schemes.
In addition to the SEIS income tax relief, there is a capital gains tax (CGT) exemption for gains realised and then invested through SEIS in the same year. (this exemption is separate from the CGT disposal relief that will apply to gains on disposals of SEIS shares.)
This form of relief exempts half of the gains made from 2013/14 onwards and thus provides up to an effective 14% CGT saving compared to the 28% CGT potentially. Again this is best served by an example: –
Example (based on an HMRC example)
‘D’ sold an asset in June 2018 for £200,000 and realised a chargeable gain (before exemption) of £80,000. If ‘D’ makes qualifying investments of at least £80,000 in SEIS shares in 2018/19 and all other conditions are met, half of the £80,000 gain will be exempt from CGT.
Note that she does not need to invest the whole £200,000 sale proceeds in order to get the 50% exemption. In addition, she would deduct £40,000 from her income tax liability (being 50% of the amount invested).
If you want further information on any of the above, please let us know.
The above is based on our current understanding of tax law which may be subject to change at any time
EIS and SEIS investments can be risky and suitable financial advice should be taken.
If you would like further help on this matter, feel free to contact Paul Dell on firstname.lastname@example.org or call 020 8551 7200.
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