Enterprise investment scheme relief: Examples

Example 1

On behalf of an investor in the EIS Fund, the Manager invests £50,000 on 1 October 2014 in shares in an EIS qualifying company that has already commenced trading. The investor had realised a taxable gain of over £50,000 in 2012, on which he had paid capital gains tax at a rate of 28%.

The investor opts to treat his investment as having been made in the 2013/14 tax year, and receives an income tax repayment through Carry Back Relief of £15,000 (£50,000 @ 30%). He also claims Capital Gains Deferral and receives a CGT repayment of £14,000 (£50,000 @ 28%). The net cost of his investment becomes £21,000.

In May 2018 the investment is sold for £250,000. There has been no breach of EIS qualifying conditions so Capital Gains Exemption applies and no tax is due on the realised gain. However, the deferred gain of £50,000 comes back into the charge to tax. On the assumption that the CGT rate has remained at 28%, and that the investor does not claim further Capital Gains Deferral, CGT of £14,000 is payable on 31 January 2020.

For a net cost of £35,000, the investor has realised £250,000, plus the benefit of deferring CGT of £14,000 for approximately five years.

Example 2

The circumstances are as in Example 1, except that the investor has not realised other gains and, unfortunately, the investment fails completely in July 2016.

The investor opts to treat his investment as having been made in the 2013/14 tax year, and receives an income tax repayment through Carry Back Relief of £15,000 (£50,000 @ 30%). The net cost of his investment becomes £35,000.

In the 2016/17 tax year the investor claims Loss Relief for his realised loss of £35,000, and opts to set it against his taxable income of the 2015/16 tax year, in which his marginal income tax rate was 45%. He receives an income tax repayment of £15,750. The total cost of his failed £50,000 investment is £19,250.

Example 3

The circumstances are as in Example 1 but, sadly, the investor dies very shortly before the sale of the investment in May 2018. The investment is sold on behalf of his estate.

As in Example 1, the net cost of the £50,000 investment becomes £21,000. On sale of the investment (on the assumption that there has been no growth in value since the investor’s death) no tax arises and, in particular, the deferred gain of £50,000 does not come back into the charge to tax.

For a net cost of £21,000, the investor and his estate have realised £250,000. Also, through the availability of BPR, the investment attracts complete exemption from inheritance tax which might otherwise have been charged at a rate of 40% of the value of the investment.

 

Seed enterprise investment scheme relief: Examples

Example 4

On behalf of an investor in the SEIS Fund, the Manager invests £30,000 on 1 October 2014 in shares in an SEIS qualifying company. The investor realises capital gains of at least £30,000 during the 2013/14 tax year through disposals of other assets.

The investor treats the investment as having been made in 2013/14 and claims SEIS Relief on his investment at a rate of 50%, and SEIS CGT Exemption on half the gains that would otherwise have suffered CGT at 28%. Thus total tax relief amounts to 64% of the investment cost, and the net investment cost is £10,800.

In May 2018 the investment is sold for £150,000. There has been no breach of SEIS qualifying conditions so Capital Gains Exemption applies and no tax is due on the realised gain. For a net cost of £10,800, the investor has realised £150,000.

Example 5

The circumstances are as in Example 4, except that the investment fails completely in September 2015.

The investor claims SEIS Relief on his investment at a rate of 50%, and SEIS CGT Exemption on half the gains that would otherwise have suffered CGT at 28%. Thus total tax relief of £19,200 amounts to 64% of the investment cost, and the net investment cost is £10,800.

In the 2015/16 tax year, when the investor’s marginal tax rate is 45%, the investor claims Loss Relief on a loss calculated for tax purposes at £15,000 (investment cost of £30,000 less SEIS Relief of £15,000). He receives an income tax repayment of £6,750. Total tax relief on the failed £30,000 investment is £25,950, resulting in a net loss of only £4,050 or 13.5%.


 

Mercia News