Tax Effecient Investments

Question 1

What are Tax Efficient Investments?

Answer 1

Investments qualifying for tax relief, encouraging investment in specific areas.

Question 2

Examples of Tax Efficient Investments

Answer 2

1. Pension and pension plans
2. Seed Enterprise Investment Scheme (SEIS)
3. Enterprise Investment Scheme (EIS)
4. Venture Capital Trust (VCT)

Question 3

What is Seed Enterprise Investment Scheme (SEIS)?

Answer 3

New shares issued by small startups, offering tax relief to investors.

Question 4

Conditions for investors to qualify for SEIS tax relief

Answer 4

1. Not an employee (directors exempt)
2. <30% share ownership
3. Max. £100,000 investment in one SEIS

Question 5

SEIS tax relief 1: Income Tax Relief

Answer 5

REDUCTION in tax liability (current and/or previous year) by lower of:

• Tax liability of current + previous year
• 50% of investment

Question 6

SEIS tax relief 2: CGT Re-investment relief and its condition

Answer 6

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)

Question 7

SEIS Tax relief 3: CGT implication on sale of SEIS shares

Answer 7

-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.

Question 8

What triggers Clawback of SEIS Relief?

Answer 8

If within 3 years,

Investor becomes non-qualifying investor
OR
Selling SEIS shares within 3 years

Question 9

How is Clawback done for SEIS Shares?

Answer 9

-Income Tax Relief withdrawn and Tax liability increases in year of withdrawal by lower of: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

Question 10

Exception to Clawback

Answer 10

Holding SEIS shares for 3 years:

1. No withdrawal of Income Tax Relief
2. No withdrawal of CGT Investment Relief
3. Gain on sale of SEIS shares exempted

Question 11

What is Enterprise investment scheme (EIS)

Answer 11

New shares issued by small UNQUOTED COMPANIES, offering tax relief to investors.

Question 12

Conditions for investors to qualify for EIS tax relief

Answer 12

1. Not an employee (even directors cant invest in EIS)
2. <30% share ownership
3. Max. £,1000,000 investment in one EIS
4. Investors should not have purchased shares other than the scheme

Question 13

EIS tax relief 1: Income Tax Relief

Answer 13

REDUCTION in tax liability (current and/or previous year) by lower of:

• Tax liability of current + previous year
• 30% of investment

Question 14

EIS tax relief 2: CGT Re-investment relief and condition

Answer 14

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

Question 15

EIS Tax relief 3: CGT on sale of EIS shares

Answer 15

-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.

Question 16

What triggers Clawback of EIS Relief?

Answer 16

Investor becomes non-qualifying or selling EIS shares within 3 years

Question 17

How is clawback done?

Answer 17

-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

Question 18

Exception to clawback

Answer 18

Holding SEIS shares for 3 years

Question 19

What is VCT

Answer 19

They are LISTED COMPANIES. They raise funds from public through share issue then invest those funds in EIS & SEIS.

Question 20

Why is investor’s risk lower in VCT

Answer 20

-Managed by experts
-Diverse portfolio of SEIS and EIS
-VCT is listed so selling shares will be easier.

Question 21

VCT Relief 1: Income tax relief

Answer 21

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.

Question 22

Maximum Investment Limit in VCT Shares

Answer 22

200,000 per year

Question 23

Holding Period Requirement for VCT

Answer 23

5 years.

Question 24

If VCT shares are sold within 5 years what will be income tax relief implication?

Answer 24

Income tax relief will be withdrawn at lower of:
1) Original relief
2) Disposal proceed x effective rate of relief

Question 25

CGT Reinvestment relief on VCT shares

Answer 25

There is no CGT Reinvestment relief.

Question 26

Disposal of VCT shares implication

Answer 26

CGT is exempt on VCT Shares. This means VCT shares are no gain/no loss. Irrespective of holding period.

Question 27

Dividend income from VCT shares

Answer 27

EXEMPT from income tax