Tax Efficient Investing

Tax Efficient Investing

Investing in growth businesses that qualify for the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) can provide significant tax savings to individuals.

Income Tax Relief

An individual taxpayer can claim 30% relief on up to £1m of investment per tax year under EIS, and 50% on £100,000 of investment per tax year under SEIS. This can be claimed in the current tax year or may be claimed against the investor's income tax liability for the previous year.

Shares must generally be held for a minimum of three years from the date of issue for any income tax relief to be retained. This relief can be claimed in the current tax year or claimed against the income tax liability for the previous year.

No Capital Gains Tax

Provided the shares are held for a minimum of three years, there is no CGT due on any gain made on selling the EIS shares.

CGT Deferral Relief

A CGT liability can be deferred by re-investing the relevant gain into EIS qualifying companies. The CGT liability comes back into charge when the shares are sold or there is another disqualifying event. CGT deferral relief can be claimed on capital gains made up to three years before making the EIS investment. There is no limit on the size of a capital gain which can be re-invested for deferral relief. CGT deferral relief is not available for SEIS investments, but the position can be improved upon. For investments up to £100k per tax year, the CGT payable on other gains made in the current or previous tax year can be halved by re-investing the gains in SEIS qualifying companies. This is an actual CGT saving rather than a CGT deferral.

Inheritance Tax Mitigation

After a two year holding period, EIS-qualifying shares are eligible for Business Property relief and fall outside of an investor’s estate for IHT purposes. This can result in 40% future tax savings for an investor’s dependents.

Loss Relief

An investor can claim loss relief on any realised losses made on EIS-qualifying shares. This can result in income tax savings at the investor’s highest rate of tax. Should a 45% higher rate taxpayer suffer full loss of an EIS investment on which 30% income tax relief had been received, then the investor would only lose 38.5p of each £1 originally invested.

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Smith & Williamson

To qualify for EIS/SEIS benefits, investors must be UK resident for tax purposes (or have UK tax liabilities) and subscribe cash for new shares in qualifying companies. Tax treatment is dependent on individual circumstances and may be subject to change.

This content is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this content. It is also important to realise that investing in small companies always carries risks, including the loss of capital, illiquidity (the inability to sell assets quickly or without substantial loss in value), lack of dividends and share dilution. Investments should still be made as part of a diversified portfolio.

Smith & Williamson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities, and is a member of Nexia International.