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SEIS/EIS Investments - What happens in one fails?




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SEIS/EIS - What happens if one of my investments fails?

Investments in SEIS/EIS companies are by their nature relatively risky, and as a result investors making a spread of investments should expect to see some winners and losers.

The tax relief is designed to provide downside protection as well as relief on the gains. Accordingly, as well as giving an exemption from capital gains tax, any loss suffered (net of income tax relief) can be claimed as a capital loss to set against capital gains of the same year, or to be carried forward to set against gains in future years. 

Alternatively, a generally more attractive choice is to elect for the loss to be set against income of the current or prior year under ITA 2007, section 131. With income tax rates typically being higher than capital gains tax rates most investors, would elect to set any loss made against their income and claim relief at up to 45%.

It should be noted that as well as being able to claim relief for the loss on a liquidation of the company, it is also possible to make a “negligible value”, claim where the value of the investment has dropped in value to a negligible amount.

 

SEIS example

Initial investment £100,000; company goes bust and nothing received on liquidation.

Assuming the investor has income taxed at 45%.

 

SEIS investment: £100,000

Income tax relief at 50%: (£50,000)

CGT relief (50% x 28%): (£14,000)

Net cost to investor: £36,000

 

The investment net of income tax relief i.e. £50,000 can be claimed as a capital loss or by election the £50,000 can be set against taxable income of the current or prior year.

Assuming the investor pays income tax at 45% the net loss of £50,000 could result in further tax relief of £22,500 (i.e. £50,000 x 45%).

Net cost to the investor on a total loss is therefore £13,500 (£36,000 - £22,500) in this example (13.5% of original investment).

 

EIS example 1

Initial investment £100,000; company goes bust and nothing received on liquidation.

Assuming the investor has income taxed at 45%.

 

EIS investment: £100,000

Income tax relief at 30%: (£30,000)

Net cost to investor: £70,000

Loss relief £70,000 x 45%: (£31,500)

Cost to the investor after tax: £38,500

 

Net cost to the investor on a total loss is therefore £38,500 in this example (38.5% of original investment).

It should be noted that if the company fails within the 3 year qualifying period and some proceeds are received from the liquidator, there will be a claw-back of income tax relief initially given on the proceeds received.

 

EIS example 2

Initial investment £10,000; liquidator returns £1,000 to investors.

Assuming the investor has income taxed at 45%.

 

EIS investment: £100,000

Income tax relief at 30%: (£30,000)

Net cost to investor: £70,000

Proceeds from liquidator: £1,000

 

Initial income tax relief of £300 (£1,000 x 30%) would be clawed back so that the net cost of the investment would be £70,300 (£100,000 – £29,700 = £70,300).

The investor would therefore have to pay £300 income tax back but could claim income tax relief of up to 45% x £70,300 = £31,635 resulting in a net cost to the investor of £37,665 (£70,000 - £1,000 + £300 - £31,635).

Net cost to the investor on a total loss is therefore £37,665 in this example (37.7% of original investment).

 

Conclusion

In the event of an investment losing value, there are attractive reliefs for SEIS and EIS investors. If the shares have negligible value a claim can be made for relief even where they are still owned. If the company has been liquidated, a decision must be made on whether to make an election to set the loss against income, and if so, whether against the income in the tax year of the loss or the previous period. It is important that tax claims and elections are made before the relevant deadlines.

 

EIS Fund Twenty8

 


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