Whether you are investing through structured financial products such as those discussed by Louise Osborne or making a direct investment in a private company, there are generous tax reliefs available to qualifying EIS investors.
Income tax relief
There are two key aspects; the first being the availability of income tax relief at a rate of 30% of the investment e.g. £10,000 investment can equate to £3,000 of income tax relief.
This is given as a direct reduction of your income tax liability and can be used in the tax year of investment, or carried back against your income tax liability for the previous tax year. To qualify for this income tax relief your residency status is irrelevant, you merely require a UK income tax liability and to meet the conditions of the EIS regime.
Qualifying for and obtaining an element of income tax relief is key, as provided the shares are held until the termination date has passed (generally three years following the share issue), any capital gain arising on the EIS shares themselves will be exempt from capital gains tax. However, I cannot stress enough, the importance of making a formal claim, even where you do not have a sufficient income tax liability to cover all of the available EIS relief. If no claim is made, no capital gains tax exemption will be achieved on the EIS shares!
Whilst capital losses are hopefully not an outcome following an EIS investment, it is also usually possible to claim a level of relief against income if capital losses are not more valuable to you.
Deferring capital gains
The second aspect is the ability to defer capital gains arising on any asset, to the extent that the investment is matched in EIS qualifying shares e.g. £1 investment = £1 of the gain deferred. The capital gain must either arise within the three years before the investment or the year following. The gain is held almost in suspense, and will come back into charge when the EIS shares are either sold, or no longer qualifies under the EIS regime.
This can be a useful tool if you have a large capital gain arising in a particular tax year, as you may be able to stage the crystallising of the deferred gain over subsequent tax years, where the annual exemption is still available, known capital losses will be generated or lower rates of tax are in effect.
When deciding whether to make a deferral claim, thought must be given to the prospect of crystallising the deferred gain in a future year when the capital gains tax rates could have increased. Currently if you are a basic rate taxpayer the rates are 10% (or 18% for residential property), and for higher rate taxpayers 20% (or 28% for residential property).
Those individuals with capital gains within the 2015/16 tax year, where the rates were set at 18% for basic rate taxpayers and 28% for higher rate taxpayers may still have time to invest within the three year window to achieve a minimum 8% tax saving (based upon the current capital gains tax rates).
There is however a reason why these tax reliefs are available for EIS shares, therefore it is crucial you speak with the financial planning team to discuss the associated risks and where investing in a private company appropriate due diligence is undertaken (please speak with our corporate finance team in this respect).