EIS guide

56 57 CASE STUDIES CASE STUDIES 1 Building a portfolio of EIS investments Carol earns a salary of £250,000 a year. She has maximised her pension contributions and has an existing portfolio of VCT investments. She is selling her buy to let portfolio and will have gains to carry over which she is looking to invest in something different this year. Carol seeks advice on building an EIS portfolio. She can claim £30,000 income tax relief EIS investment £100,000 Year 1 Year 4 Year 5 Year 2 EIS EIS investment +£100,000 £30,000 income tax relief Year 3 EIS EIS investment +£100,000 £30,000 income tax relief *If she is making the investments through an EIS fund, the manager may dictate the timing of any exits, depending on the terms and conditions of the investment. Additionally, the client or manager may not be able to dispose of the EIS-qualifying shares immediately after three years. This might not be possible unless there is a ready market for these shares. Any disposal of the shares may not necessarily realise a profit. Carol can sell and reinvest her year two investment and again claim further income tax relief. And so on. Min. holding period achieved for 1st EIS investment Min. holding period achieved for 2nd EIS investment £36,000 (£120,000 x 30%) tax relief is now available to Carol Carol sells her 1st investment for £120,000* and reinvests the full amount in EIS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 EIS Investment £100K £100K £100K £120K £120K £120K Cumulative investment £100K £200K £300K 30% income tax relief £30K £30K £30K £36K £36K £36K Cumulative income tax relief £30K £60K £90K £126K £162K £198K 2 Building a portfolio to accompany pensions David is 55 years old (10 years from retirement) and works as a civil engineer at a large firm. He earns £155,000 a year, so in 2019/20 is a 45% taxpayer. He has now reached the lifetime allowance limit on his pension pot. After consideration of the tax relief available on the pension contribution and the future impact of the Lifetime allowance, David is advised to consider alternatives from his pension. He also has VCT investments. *If he is making the investments through an EIS fund, the manager may dictate the timing of any exits, depending on the terms and conditions of the investment. Additionally, the client or manager may not be able to dispose of the EIS-qualifying shares immediately after three years. This might not be possible unless there is a ready market for these shares. Any disposal of the shares may not necessarily realise a profit. David stops making annual pensions contributions and instead he makes annual contributions of £40,000 into EIS This gives David £12,000 per year income tax relief £40,000 After each EIS investment reaches 3 years, he would like to exit subject to being able to dispose of the EIS-qualifying shares and reinvest the proceeds in EIS. The amount of relief available increases as the investment amounts are compounded. He does this until he is 65*. 3 years £938,000 David ends up with a large amount for his retirement Tax year Age EIS investment Gain & capital recycled from previous EIS investment reinvested Total EIS investment in year EIS income tax relief in year Total CGT payable on gains Total value 2019/20 55 £40,000 £0 £40,000 £12,000 £0 £52,000 2020/21 56 £40,000 £0 £40,000 £12,000 £0 £104,000 2021/22 57 £40,000 £0 £40,000 £12,000 £0 £156,000 2022/23 58 £40,000 £50,000 £90,000 £27,000 £0 £233,000 2023/24 59 £40,000 £50,000 £90,000 £27,000 £0 £310,000 2024/25 60 £40,000 £50,000 £90,000 £27,000 £0 £387,000 2025/26 61 £40,000 £112,500 £152,500 £45,750 £0 £545,250 2026/27 62 £40,000 £112,500 £152,500 £45,750 £0 £703,500 2027/28 63 £40,000 £112,500 £152,500 £45,750 £0 £861,750 2028/29 64 £0 £0 £0 £0 £0 £899,875 2029/30 65 £0 £0 £0 £0 £0 £938,000 The table assumes exits immediately after expiration of three year holding period and 25% gain at each exit.