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Is higher risk tax relief for you? We take a look….

For clients with a higher risk appetite, investment in social enterprises, subscribing for shares in a new VCT or under the EIS or SEIS may be appealing.

Is higher risk tax relief for you? We take a look...

by
Rachael Cornwell + Stuart Walton

28.02.2019

Tax year End series.  No 2: Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS), Seed EIS (SEIS) & Social Investment Tax Relief (SITR)

By Rachael Cornwell & Stuart Walton of Charles Stanley Financial Planning.

One of the most common questions asked at this time of year surrounds end of year tax planning, in the second article on this subject, Rachael Cornwell and Stuart Walton take a look at Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS), Seed EIS (SEIS) & Social Investment Tax Relief (SITR) and ask, is it for you?

For clients with a higher risk appetite, investment in social enterprises, subscribing for shares in a new VCT or under the EIS or SEIS may be appealing.  These investments are not suitable for all investors as they are complex and high risk, therefore advice should be obtained prior to making an investment.

VCT:  Income tax relief applies to the purchase of newly issued VCTs, currently at the rate of 30% on investments of up to £200,000 per tax year. Tax relief is provided by way of a tax credit set against the individuals total income tax liability and, therefore, cannot exceed the total income tax liability for the tax year.  The VCT must be held for at least five years to retain the income tax relief.  Any dividends received are usually tax free. If the VCT shares are sold, even within the first five years, there will be no capital gains tax liability provided the company has maintained its VCT status.

EIS:  Income tax relief, currently at the rate of 30% can be claimed on investments of up to £1,000,000 per tax year in EIS qualifying shares, however, the relief claimed cannot exceed the individuals total Income tax liability for the tax year. The shares must be held for at least three years from the date of issue to retain the income tax relief.  Any dividends received are usually tax free. Any gains made will be free of capital gains tax provided the shares are held for at least three years and income tax relief was claimed on them.

For EIS qualifying shares, there is a ‘carry back’ facility available.  This means in the event an individual subscribes to EIS qualifying shares after 6 April 2019, it is possible to carry back income tax relief to the 2018/2019 tax year, similarly, investor in the current tax year could carry back to 2017/2018.

SEIS: Similar to the EIS, the SEIS offers enhanced tax reliefs for investment in smaller companies.  Income tax relief, currently at the rate of 50% can be claimed on investments of up to £100,000 per tax year in SEIS qualifying shares; however, the relief claimed cannot exceed the individual’s total income tax liability for the tax year.  Like the EIS, the carry back rules allow an investment in the current tax year to be treated as though it was made in the previous tax year.  If any gains are reinvested in a qualifying SEIS, up to 50% of the reinvested gain will be exempt from capital gains tax.

SITR: The government offers tax relief for social investment to encourage individuals to support social enterprises. Income tax relief, currently at the rate of 30% can be claimed on investments of up to £1,000,000 in the current tax year, provided it does not reduce the individual’s income tax liability to below zero.  As with the EIS and SEIS using ‘carry back’ to the previous tax year is also possible.

Tax reliefs are those currently applying and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.

 

Charles Stanley is not a tax adviser.  Information contained in this article is based on our understanding of current HMRC legislation.  Tax reliefs are those currently applying and the levels and based of taxation can change.  Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.  If you are in any doubt, you should seek professional tax advice.

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