Tax Breaks

Tax Breaks

The Enterprise Investment Scheme (EIS) is a government-backed initiative designed to incentivise investment into small and emerging growth businesses in the UK. There are various highly attractive tax breaks for investors to benefit from, including 30% income tax relief, capital gains tax relief (CGT), inheritance tax (IHT) exemption, CGT deferral and loss relief.

However, our view is that the EIS tax incentives should be considered purely as an added benefit and not the primary reason to invest in venture capital. EIS is a useful tool where investors can look to maximise their profits but also shelter their tax burden and benefit from limited net exposure in what are regarded as high-risk investments.

1. INCOME TAX RELIEF

An individual can reduce their income tax liability by 30% of the amount invested, regardless of an individual’s tax rate but assuming they have enough taxable income. If an individual has not used their EIS allowance in the previous tax year they can carry back up to 100% of their investment to the previous year for purposes of income tax relief.

This relief is available against a UK income tax liability regardless of whether the investor is resident in the UK. In order to receive income tax relief, the maximum level of investment into EIS qualifying companies is £1million per investor per tax year. The investment must be held for a minimum of 3 years from the date of issue.

Income Tax relief of 30% of the amount invested.

Gross investment £100,000
Less: Income tax relief at 30% £30,000
Net investment cost £70,000

2. CAPITAL GAINS TAX DEFERRAL RELIEF:

Investors who have realised a capital gain on another investment within the last 3 years or expect to incur a taxable gain in the next year can benefit from capital gains tax deferral relief.

This class of relief is unlimited but investors must be resident in the UK.

Capital gains tax liability assumed to be at the current 28% rate based on a gain of £100,000.

Gross investment £100,000
Less: Income tax relief at 30% £30,000
Investment cost £70,000
Capital gains tax liability deferred £28,000
Net investment cost £42,000

3. CAPITAL GAINS TAX EXEMPTION:

Assuming shares are held for a minimum of 3 years and retain their EIS status, no Capital Gains Tax is payable on sale of the shares. If the EIS investment is held at death, then the CGT liability is eliminated enabling the full value of the EIS investment to be passed on to the beneficiaries.

If the EIS investment is held at death, then the CGT liability is eliminated enabling the full value of the EIS investment to be passed on to the beneficiaries.

4. LOSS RELIEF:

Any loss suffered on disposal of an investment (after allowing for the income tax relief received) can be offset against an individual’s income or capital gains tax in the current or previous tax year.  

With EIS investments, each individual holding is assessed separately for loss relief. This means that any holding that has fallen in value at the time of sale will qualify for loss relief irrespective of the overall portfolio performance. Even if only one holding within a portfolio of ten investments falls in value, investors are entitled to loss relief on that one holding. Gains offset against income tax have the net effect of limiting the investment exposure to 38.5% of the amount invested for a 45% taxpayer if the investor realises a total loss. Alternatively, losses can be offset against Capital Gains Tax at the current rate of up to 28%.

Loss relief based upon an individual’s maximum 45% income tax rate and full loss of investment.

Realised value of shares £0
Gross investment £100,000
Less: Income tax relief at 30% £30,000
Loss before loss relief £70,000
Tax relief at 45% £31,500
Net Loss £38,500

5. INHERITANCE TAX EXEMPTION:

Investments are typically exempt from Inheritance Tax after 2 years.

An EIS investment becomes a particularly attractive proposition when an investor can benefit from two or more of these incentives as they can all be used in conjunction. For example, an investor can use EIS to defer a capital gain, whilst also making an investment that’s free from IHT and even enable an income tax saving to be made as well.

Westhill Finance

West Hill Capital LLP is an appointed representative of West Hill Corporate Finance Limited, which is authorised and regulated by the Financial Conduct Authority.

This website is directed exclusively at and intended to be used only by persons in the UK that are Professional Investors and/or other exempted persons under the Financial Services and Markets Act 2000 ("FSMA"). Other persons should not use, rely on or act upon its content in any circumstances.

The material on this website is for general information only and should not be regarded as constituting an offer or a solicitation to buy or sell any securities. It is expressly understood that nothing on this website constitutes investment advice. If you require investment advice you should contact a professional adviser.

Investment in private companies carries a high degree of risk. It is highly speculative and there is no recognised market for these shares. Investors in private companies must have no need for liquidity and must be able to withstand a total loss of investment. Past performance is not an indication of future performance and investments may go down as well as up. The level of tax treatment depends on your individual circumstance.

Tax breaks exist under current legislation and are subject to change. We do not provide tax advice and nothing here should be construed as such. We recommend that you obtain your own independent tax and legal advice tailored to your individual circumstances.

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