EIS guide

9 8 RISKS AND REWARDS RISKS AND REWARDS Comparison of risks with VCTs The other major tax-advantaged venture capital scheme in the UK is a Venture Capital Trust (VCT). The biggest difference between VCTs and EIS is that VCTs generally operate a much bigger pool of investee companies, giving increased diversification and limiting investment risk. Secondly, as they are listed on a recognised exchange and hold more liquid assets than EIS funds (up to 20% of the VCT’s funds are not required to be invested in qualifying holdings, reduced from 30% for accounting periods ending on or after 6 April 2019), they have increased liquidity. However, EIS has a broader range of tax reliefs. A comparison of the tax reliefs is provided on page 20. TAX RELIEFS IN SUMMARY EIS tax reliefs are only available to investors with a UK tax liability, and are only available if the investee company maintains its qualifying status thoughout an investor’s minimum three-year holding period. The amount of RATE OF RELIEF MINIMUM HOLDING PERIOD WINDOW OF OPPORTUNITY MAXIMUM LIMIT FURTHER CONSIDERATIONS INCOME TAX RELIEF Up to 30% of the value of EIS-qualifying shares subscribed for 3 years from the acquisition date of the shares (however, if the company is not trading when the shares are issued, the period ends on the third anniversary of commencement of the trade) The tax year of the share issue, with the potential to carry back some or all of the investment to the previous tax year £300,000, based on the annual EIS limit of £1 million. It is also possible to carry back an investment of up to £1 million to the prior tax year. From 6 April 2018, the annual investment limit on individuals doubled from £1 million to £2 million, provided any amount above £1 million is invested into knowledge-intensive companies Can only be offset against income tax paid. Income tax relief must be claimed, and not withdrawn, in order to achieve tax-free growth - see below EIS REINVESTMENT RELIEF (CGT DEFERRAL RELIEF) 100% of a gain can be ‘deferred’ if it is invested in qualifying shares, thereby deferring the CGT liability The gain crystallises when the qualifying shares are disposed of (or deemed to be disposed of) 3 years after or one year prior to the disposal of the original asset giving rise to the gain Unlimited If the EIS shares are disposed of, the crystallised gain can be reinvested into further EIS shares and deferred again IHT RELIEF 100% of the value of the EIS shares at the time of death (or other chargeable event for IHT purposes) 2 years from the date of acquisition of the shares where the company is trading at the time of the share issue. Replacement business property rules may also apply Relief must be applied for by the executors of the deceased’s estate (IHT must usually be paid within 6 months from the end of the month of death) or by the transferor in the event of a lifetime transfer Unlimited IHT is unlikely to be primary driver when considering an EIS investment TAX-FREE GROWTH 100% CGT exemption on EIS shares 3 years from the acquisition date of the shares (if the company is not trading when the shares are issued, the period ends on the third anniversary of commencement of the trade) No CGT to pay upon disposal if EIS shares are sold at a gain Unlimited Income tax relief must have been claimed and not subsequently withdrawn in relation to the purchase of the EIS shares LOSS RELIEF Losses can be offset against capital gains or income tax and the prevailing rates will depend upon the individual’s circumstances and tax position None Losses can be offset against other capital gains in the year of the loss and any excess can be carried forward. Losses can potentially also be offset against income tax in the current or preceding tax year 100% of the capital loss on the EIS shares (less the income tax relief), provided there are sufficient gains / income tax to offset the loss against relief an investor will get depends on their individual circumstances. While it is important to understand the details of the tax reliefs available, tax should not be the only driver for investment in shares in an EIS- qualifying company. The investment must be suitable for the client even without taking tax relief into consideration and there is likely to be a specific planning scenario involved. There are FIVE potential tax reliefs available for EIS investors, some or all of which may be available/applicable to a particular investor: • Up to 30% income tax relief • 100% EIS deferral relief • 100% IHT relief (via BR after a minimum holding period, applicable to most EIS- qualifying companies) • Tax-free capital growth (subject to meeting certain conditions throughout the minimum holding period and claiming income tax relief) • Loss relief (losses are available to offset against capital gains or, in certain circumstances, income tax) TAX RELIEFS SUMMARY