EIS guide

11 10 RISKS AND REWARDS RISKS AND REWARDS Income tax relief: Examples of use EIS investors can claim a reduction in their income tax bill of 30% of the cost of the EIS- qualifying shares they have subscribed for. The reduction can either apply to the tax year in which the shares were issued, or it can be carried back to the previous tax year (subject to how much, if any, of the previous year’s allowance is still available). Example A client who subscribed for £250,000 of EIS- qualifying shares would be entitled to claim up to £75,000 of income tax relief (£250,000 x 30%). While we recognise the potential benefits of EIS as an investment opportunity, it is important that investors who acquire EIS- qualifying shares have a clear understanding of the risks, as well as the benefits, associated with investing in them. The maximum that can be invested in EIS-qualifying opportunities annually by an individual (and still qualify for the income tax relief) is £1 million. From 6 April 2018, this was extended to £2 million provided that any amount above £1 million is invested in knowledge-intensive companies. The 30% income tax relief applies to this extra limit also. This means that the maximum income tax relief in a single year is £600,000 (£2 million x 30%). Example 1 A client could subscribe for £2 million of EIS- qualifying shares and, assuming that they had not used any of the previous year’s EIS income tax relief allowance, they could carry £1 million of the share purchase back, thus claiming £600,000 income tax relief in total: (£1 million x 30% = £300,000 relief in 2019/20 + £1 million x 30% = £300,000 relief carried back to the previous year). However, if the client had subscribed for £600,000 of EIS-qualifying shares in the previous year (and claimed the tax relief for that year), then they would only be able to carry back £400,000 of 2019/20’s purchase (£1 million - £600,000) and claim £120,000 income tax relief for 2019/20. Example 2 Alternatively, a client could subscribe for £2 million of EIS-qualifying shares, £1 million of which represents holdings in knowledge- intensive companies. They could then claim £600,000 income tax relief in total in the 2019/20 year (£2 million x 30% = £600,000). The minimum holding period to retain income tax relief starts on the date of the share issue. It ends on the third anniversary of the later of the date of the share issue and the date of commencement to trade. If an investor disposes of their shares prior to the end of the three-year period, HMRC claws back the income tax relief. Example 1 The clawback can never be more than the amount of the initial income tax relief (subject to any interest that may be due). If the shares are disposed of at a gain within three years, HMRC will claw back the full amount of the tax relief received. Assume a client subscribes for £500,000 of EIS- qualifying shares and receives £150,000 income tax relief. If the client was to then sell those shares for £1 million within three years, HMRC would claw back the full £150,000. It might only make sense to sell the shares within the three- year period, when the sales proceeds exceed any clawback of income tax relief and any CGT liabilities. Example 2 If the shares are disposed of at a loss within three years, the clawback will be equivalent to the sales proceeds multiplied by 30%. Assume a client buys £500,000 of EIS-qualifying shares and receives £150,000 income tax relief. If the client was to then sell those shares for £400,000 within three years, HMRC would claw back £120,000 (£400,000 x 30%) - the client may be able to claim share loss relief on the net loss of £70,000 i.e. £100,000 less the remaining income tax relief of £30,000). POINTS TO NOTE: Example A client who subscribed for £250,000 of EIS- qualifying shares would be entitled to claim up to £75,000 of income tax relief (£250,000 x 30%). If the client had only paid £50,000 of income tax over the previous two years, £25,000 of that relief would be lost (£75,000 - £50,000). An investor’s overall income tax liability cannot be negative (i.e. it is not possible to claim relief on tax that hasn’t been paid or isn’t due to be paid). We are doubling EIS investment limits for knowledge intensive companies, while ensuring that EIS is not used as a shelter for low-risk capital preservation schemes. PHILIP HAMMOND, CHANCELLOR OF THE EXCHEQUER, BUDGET 2017 1 2 3