The 2016/17 tax year is over and behind us now, but there’s still a lot you can do to reduce your tax liability – and there’s nothing to be lost by starting to think about that now.
The two main opportunities that this article discusses are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). Don’t be put off by the word ‘scheme’ – these are government-approved schemes, set out in tax legislation, that are intended to encourage equity investment into unquoted trading companies, to help this key part of the economy to grow.
The Enterprise Investment Scheme
Making an EIS investment of, say, £100,000, now could cut up to £58,000 from your 2016/17 tax bill, by making an EIS carry back claim. Here’s how.
Income tax relief
The EIS has been around since 1994, so is a well-established part of the UK tax landscape for investors. Income tax relief is available at 30% of the amount invested, gains on disposal are exempt from capital gains tax, the shares are exempt from Inheritance Tax, and if you do make a loss, the loss can be set against income or capital gains. The maximum that can be invested each tax year is £1m, and income tax relief can be claimed in the year of investment, or the previous year. This means that if you have a tax liability for the 2016/17 tax year you can mitigate this by making an EIS investment in the current tax year, and carrying it back.
Income tax relief is given at 30% of the investment, regardless of what your top rate of tax is. The relief can reduce your tax liability to nil, but no further, and it is important to claim some income tax relief on each investment, as the capital gains tax exemption on disposal is only available where at least some income tax relief has been given. There is a three-year qualifying period that the shares must be held for – tax relief will be given at the outset, but can be clawed back if you dispose of the shares before then. There are rules around investment in companies that you are connected to, so check these before investing in a company that you have links to.
There are complex rules around what type of company qualifies for EIS investment, so you should always check that the company has an ‘advance assurance’ from HMRC.
Capital gains tax (CGT) deferral relief
If you have capital gains in 2016/17, greater than the annual exemption, these can be deferred by making an EIS investment. CGT deferral relief freezes the gain, and the tax liability is deferred until the EIS shares are disposed of, although a further EIS investment can be made when that happens, to re-defer the tax liability. Gains deferred in this way wash out on death.
Gains arising up to three years before, and one year after, the EIS shares are issued can be deferred and there is no limit on the amount that can be invested, except for a £5m per year cap on the amount an investee company can receive, so this is a very flexible tax relief. Normal EIS rules restricting tax relief on investment in companies that you are linked to do not apply where only deferral relief is claimed, though investing in companies that you have no links with will produce greater tax savings.
In summary (or TL;DR)
- £100,000 EIS investment made in the 2017/18 tax year:
- Carry back income tax relief @30% £30,000
- Deferred gain on residential property £28,000
- Tax saving for 2016/17, up to £58,000
Gains on assets such as quoted shares are liable to capital gains tax at 20%.
Seed Enterprise Investment Scheme
Income tax relief
The SEIS is very similar to the EIS, except that it is aimed at newer, smaller companies. Broadly speaking, these must be less than two years old, have fewer than 25 employees and gross assets of less than £200,000. Startup companies like this are perceived to be more risky, so income tax relief is more generous, at 50% – again this is regardless of your own top rate of tax, and you can only reduce your tax liability to nil. Capital gains on disposal are exempt from tax, and the shares will be exempt from inheritance tax as well, provided they have been held for at least two years. The maximum investment is £100,000 per tax year, and, like the EIS, relief can be claimed in the current or previous tax year. The same three year qualifying period applies to SEIS as in the EIS.
As with the EIS, qualifying company rules are complex, and you should check that the company has ‘advance assurance’ from HMRC.
Capital gains tax reinvestment relief
Under the SEIS, up to 50% of your capital gains can be eliminated, rather than just deferred under the EIS, although the maximum allowable investment is just £100,000. Relief on 50% of the capital gain is given where the amount of the gain is reinvested in SEIS shares.
- £100,000 SEIS Investment made in 2017/18 and carried back to 2016/17
- Carry back income tax relief @50% £50,000
- Exempted gain on residential property £14,000
- Tax saving for 2016/17, up to £64,000
Investing in EIS and SEIS companies
Finding the right company to invest in can be difficult, particularly if you are not part of a business angel group, which is where SyndicateRoom comes in. Plus of course, investment in early-stage, unquoted trading companies is perceived to carry a higher level of risk – that is why the government makes the tax reliefs available. It is advisable to spread your investments to mitigate risk and remember that if your investment does fail it is possible to claim income tax relief at up to 45% on the investment made net of up front income tax relief received.