Objective: To mitigate Tom’s income tax liability

Question 1

Explain to Tom the features of an EIS and an SEIS, and comment on the suitability of this type of investment towards his aim of reducing his income tax liability.

Amounts

Tax Relief

Clawback Period

Reinvetment Relief Period

Dividends

Capital Gains Tax

Loss Relief

100% Business Releif

Answer 1

Question 2

Annual investment limit EIS/ SEIS

Answer 2

£1m (or £2m if knowledge-intensive companies)

£100,000

Question 3

Income tax relief (up to the maximum of his income tax liability)

Answer 3

30%

50%

Question 4

Clawback period for tax relief

Answer 4

3 Years Both

Question 5

Re-investment relief period

Answer 5

EIS Gains from 1 year before and 3 years after can be deferred

SEIS

Re-invested gains of up to £50,000 are completely exempt from CGT rather than just deferred, and the balance up to £100,000 would be deferred

Question 6

Taxation of Dividends

Answer 6

Income Tax as normal for Both

Question 7

Capital gains

When tax free is Deferral available

Answer 7

Tax free after 3 years plus CGT deferral available

Tax free after 3 years plus CGT deferral/exemption available

Question 8

When do they get Loss Relief

When do they get 100% Business Relief for IHT

Answer 8

After 3 Years / Loss relief

After 2 Years B relief

Question 9

comment on the suitability of this type of investment towards his aim of reducing his income tax liability (7).

Answer 9

As Tom has an adventurous risk profile, he may be willing to accept the risk involved with either an EIS or SEIS for a small part of his investment portfolio  He would be able to reduce his tax bill by 30% of the sum he invests in the EIS or 50% of the sum he invests in the SEIS (up to a limit of £100,000)

 He should however restrict the amount of his investment to the amount of his tax due for 2018/19 as his tax can only be brought down to zero

 He could however also carry back a contribution to 2017/18 and claim back tax relief

 He would have to be aware of the three-year clawback period that applies with regards to income tax and CGT on both the EIS and the SEIS  The Business Relief would also be useful in relation to their inheritance tax planning

 He would have to invest in what is a high-risk investment in order to benefit from these tax advantages, and he should bear in mind that the shares could be very difficult to sell

 This is especially true with regards to the SEIS which only invests in small unquoted companies (fewer than 25 employees and with gross assets of less than £200,000) that have been trading for less than two years

Question 10

Explain why a Venture Capital Trust (VCT) may be a suitable investment for Tom in respect of his current circumstances and financial objectives (7)

Answer 10

They match his ATR

 30% income tax relief on contributions/acts as a tax reducer

 Though the relief is restricted to the amount of income tax paid

 The relief is clawed back if not held for five years  Dividend payments of up to £200,000 are not subject to any further income tax

 No Capital Gains Tax on any VCT gains from outset

 No Capital Gains Tax on death