Tax Effecient Investments Flashcards
What are Tax Efficient Investments?
Investments qualifying for tax relief, encouraging investment in specific areas.
Examples of Tax Efficient Investments
- Pension and pension plans
- Seed Enterprise Investment Scheme (SEIS)
- Enterprise Investment Scheme (EIS)
- Venture Capital Trust (VCT)
What is Seed Enterprise Investment Scheme (SEIS)?
New shares issued by small startups, offering tax relief to investors.
Conditions for investors to qualify for SEIS tax relief
- Not an employee (directors exempt)
- <30% share ownership
- Max. £100,000 investment in one SEIS
SEIS tax relief 1: Income Tax Relief
REDUCTION in tax liability (current and/or previous year) by lower of:
- Tax liability of current + previous year
- 50% of investment
SEIS tax relief 2: CGT Re-investment relief and its condition
If an investor invests proceeds from disposal of any asset in SEIS, then gain of that asset will be exempted at lower of:
- 50% gain
- 50% of investment
Condition: 1-3 rule
(Reinvestment can be done 1 year before or uptil 3 years after disposal of asset)
SEIS Tax relief 3: CGT implication on sale of SEIS shares
-sold AFTER 3 years =gain exempt
-sold WITHIN 3 years =gain chargeable
Loss on disposal = loss will always get relief, irrespective of whether shares are sold before or after 3 years.
This loss can be claimed in CGT or in income tax also.
What triggers Clawback of SEIS Relief?
If within 3 years,
Investor becomes non-qualifying investor
OR
Selling SEIS shares within 3 years
How is Clawback done for SEIS Shares?
-Income Tax Relief withdrawn and Tax liability increases in year of withdrawal by lower of:
- Original relief
- Disposal proceed * effective rate of relief (original relief /original investment *100)
-Gain exempted through reinvestment relief will get chargeable
-Gain on sale of SEIS shares will also get chargeable
Exception to Clawback
Holding SEIS shares for 3 years:
- No withdrawal of Income Tax Relief
- No withdrawal of CGT Investment Relief
- Gain on sale of SEIS shares exempted
What is Enterprise investment scheme (EIS)
New shares issued by small UNQUOTED COMPANIES, offering tax relief to investors.
Conditions for investors to qualify for EIS tax relief
- Not an employee (even directors cant invest in EIS)
- <30% share ownership
- Max. £,1000,000 investment in one EIS
- Investors should not have purchased shares other than the scheme
EIS tax relief 1: Income Tax Relief
REDUCTION in tax liability (current and/or previous year) by lower of:
- Tax liability of current + previous year
- 30% of investment
EIS tax relief 2: CGT Re-investment relief and condition
If an investor invests proceeds from disposal of any asset in EIS, then gain of that asset will be DEFERRED at lower of:
- 100% gain
- 100% of investment
Condition: 1-3 rule
Reinvestment can be done 1 year before or uptil 3 years after disposal of asset
EIS Tax relief 3: CGT on sale of EIS shares
-If shares are sold AFTER 3 years, then gain on disposal will be exempt
-If shares are sold WITHIN 3 years, then gain on disposal will be chargeable
-If there is loss on disposal, that loss will always get relief, irrespective of whether shares are sold before or after 3 years. This loss can be claimed in CGT or in income tax also.
What triggers Clawback of EIS Relief?
Investor becomes non-qualifying or selling EIS shares within 3 years
How is clawback done?
-Income Tax Relief withdrawn and Tax liability increases in year of withdrawal by lower of:
- Original relief
- Disposal proceed * effective rate of relief
-Gain deferred through reinvestment relief will get chargeable
-Gain on sale of EIS shares will also get chargeable
Exception to clawback
Holding SEIS shares for 3 years
What is VCT
They are LISTED COMPANIES. They raise funds from public through share issue then invest those funds in EIS & SEIS.
Why is investor’s risk lower in VCT
-Managed by experts
-Diverse portfolio of SEIS and EIS
-VCT is listed so selling shares will be easier.
VCT Relief 1: Income tax relief
Lower of:
1) Tax liability of YEAR OF INVESTMENT ONLY
or
2) 30% of investment
Income tax relief of VCT cannot be carried back to previous year.
Maximum Investment Limit in VCT Shares
200,000 per year
Holding Period Requirement for VCT
5 years.
If VCT shares are sold within 5 years what will be income tax relief implication?
Income tax relief will be withdrawn at lower of:
1) Original relief
2) Disposal proceed x effective rate of relief
