EIS Tax Relief Explained

Posted on

1. Income Tax Benefit From EIS Tax Relief

Tax relief of 30% can be claimed on investments (up to £1m in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.

 

The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn. EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year.

 

2. Capital Gains Tax Exemption (CGT)

Gains are exempt from CGT if the shares are held for at least three years and the income tax relief was claimed on them.

 

3. Loss Relief

If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.

 

4. Capital Gains Tax Deferral Relief

Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose – connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.

 

For more information, please see the HMRC website.

 

 

Worked Examples

Let’s assume you invest £10,000 in each company and you’re a high rate tax payer (45% tax bracket).

Company 1: The company does well and triples its value and you hold the shares for 3 years

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Capital Gains Tax = nil

 

Your gain = £23,000 (£20,000 profit from the sale plus £3,000 income tax relief)

 

Company 2: You sell your shares for what you paid for them after 3 years

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Share sales = £10,000

 

Your gain = £3,000 (from the income tax relief)

 

Company 3: The company fails and shuts down and your shares are worth nothing

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

At risk capital = £7,000

Loss relief on at risk capital @ 45% = £3,150

 

Your actual loss = £3,850    (£10,000 – £3,000 – £3,150)

 

jude@sharein.com'

About 

    Find more about me on:
  • googleplus
  • linkedin
  • skype
  • twitter
  • youtube


Tags: , ,