Tax Efficient Investments VCT, EIS and SEIS

investment coin jar

As I continue this short series on how to reduce next year’s tax liability I’m looking this week at tax efficient investments.

Many of you will have heard terms such as VCT, EIS or SEIS but not really been aware of the considerable tax benefits on offer.

Before we get started its important to note that this article is in no way intended as investment advice and as such you should seek professional advice before investing in any of the schemes we will review. This short article is written with the intention of highlighting some of the benefits and the rules relating to this type of investment.
ok now the disclaimer is out of the way we can move on.

Why do these schemes exist?

Venture Capital Trusts (VCT), Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) all exist because the government wants to boost investment in the UK and to encourage you to invest there are some rather attractive tax reliefs on offer.

How does the Tax Relief Work?

There are normally two forms of tax relief with each scheme.

  1. Income tax relief
  2. Capital Gains Tax relief

Income Tax Relief

In the case of SEIS you can receive an income tax credit of up to 50% (30% for EIS and VCT) of your investment value either in the year of the investment or carried back to the previous year. (you can’t carry forward)

Let’s take a simple look at how that might work and we’ll borrow the example used in last week’s dividend allowance article.

Example Saving (Bob’s Tax Bill)

Total Income £60k (Salary £8000 + £52k Dividends)

First £11,500 Tax Free (£0)
First £ 5,000 Dividend Tax Free (£0)
Next £28,500 Basic Rate Band 7.5% (£2137.50)
Next £15,000 Higher Rate Band 32.5% (£4875.00)
Total Tax Liability £7012.50

The above represents a straight forward tax liability calculation but now let’s assume that Bob makes a £9,000 investment in an SEIS scheme.

SIES qualifying investment £9,000 = 50% tax relief - £4,500 income tax credit.

Original Tax liability was £7012.50 but this is now reduced by £4,500 to just £2,512.50. What a result!

In this scenario the Bob has a £9,000 investment in a qualifying SEIS scheme and HMRC gave him £4,500 straight back!

HMRC basically just paid for 50% of Bob’s investment. (note: VCTs and EIS are credited at 30%)

Capital Gains Tax relief - it gets even better!

Winning Scenario: Ok so let’s say Bob gets lucky and his investment doubles over the course of 3years and is now worth £18,000.

Bob’s capital gain qualifies for a Tax Exemption meaning he pays no tax on the profit. In our example the total investment of £9,000 was reduced by a 50% income tax credit to £4,500. This was then turned into an investment worth £18,000, which is a healthy profit, all of which is tax exempt.

Losing Scenario: These schemes are setup to invest in early stage ventures so are therefore considered riskier; what if Bob lost his money?

Let’s say the investment turned out to be worthless and Bob lost his £9k.

In a loss-making scenario, both SEIS and EIS investments, losses can be offset against any other capital gain or income in the tax year.

So he lost £9k but has already had £4.5k back so his actual loss was £4.5k (50%). This £4.5k can be used to reduce his other capital gains or income in the tax year.

To put that simply if Bob had other capital gains of £25k he would net off the £4.5k loss and be taxed on the balance of £20,500.

If Bob had taxable income in the year of the loss of £50k then he would reduce this by the £4.5k loss and be taxed on income of £46,500.
(note: VCT investments carry no loss relief)

All too Good to be True?

Well maybe, as the investments themselves can be highly risky which is why you should speak to a professional advisor, but there are some rules to be aware of;

Some of the Rules;

The maximum annual investment for EIS is £1m, SEIS £100k and VCT £200k.

Tax relief of 50% for SEIS and 30% for EIS and VCT investments can’t result in a cash back situation. This means that in Bob’s case his total tax bill was originally £7012.50. If he decided to invest £20k in a qualifying SEIS scheme the maximum tax credit would be 100% of his original liability (£7012.50). HMRC will not pay you cash where the credit exceeds your tax liability.

You will pay tax on any dividends received from these investments in the normal way.

You and your associates can’t hold a total of more than 30% of the company’s shares, assets, voting rights or loan capital and you can’t be employed by the company. (associates are – family or civil partners and business partners).

Minimum holding period for Capital Gains Tax exemption – EIS and SEIS 3years – VCT is 5years.

Must be a qualifying scheme – In the case for VCT investments you’ll normally only be able to do this through a broker so the investment will be pre-qualified but for EIS and SEIS its common for small business owners to reach out to friends for investments in their businesses under one of these schemes so you’ll need to ensure it qualifies. HMRC can give advanced assurance so be sure to check this has been given before investing in a friend’s business.

Conclusion

There are some amazing tax breaks available, but caution must be used when evaluating the risk to your capital. VCT, SEIS and EIS all have the ability to greatly reduce your tax liability but will require you to lock away capital for at least 3years and certainly in the case of SIES it can be very hard to sell on your investment.

If you would like more information on these investments and the relating rules you can visit HMRC’s website here.

If you’re interested in raising money for your business by offering shares under EIS or SEIS you can read more on how to qualify on the HMRC website here.

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