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
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
Reinvestment can be done 1 year before or uptil 3 years after disposal of asset
SEIS Tax relief 3: CGT on sale of SEIS 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. the extra relief given (if DP*effective rate) is used will be deducted from the loss at disposal and remaining amount can be claimed.
What triggers Clawback of SEIS Relief?
Investor becomes non-qualifying due to:
- Becoming an employee
- Exceeding 30% ownership
- Investing > £100,000
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-Income Tax Relief withdrawn and Tax liability increases in year of withdrawal by lower of: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
-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
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
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.
the extra relief given (if DP*effective rate is used) will be deducted from the loss at disposal and remaining amount can be claimed.