Tax Effecient Investments Flashcards

1
Q

What are Tax Efficient Investments?

A

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

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2
Q

Examples of Tax Efficient Investments

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

What is Seed Enterprise Investment Scheme (SEIS)?

A

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

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4
Q

Conditions for investors to qualify for SEIS tax relief

A
  1. Not an employee (directors exempt)
  2. <30% share ownership
  3. Max. £100,000 investment in one SEIS
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5
Q

SEIS tax relief 1: Income Tax Relief

A

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

  • Tax liability of current + previous year
  • 50% of investment
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6
Q

SEIS tax relief 2: CGT Re-investment relief

A

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

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7
Q

SEIS Tax relief 3: CGT on sale of SEIS shares

A

-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.

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8
Q

What triggers Clawback of SEIS Relief?

A

Investor becomes non-qualifying due to:

  1. Becoming an employee
  2. Exceeding 30% ownership
  3. Investing > £100,000

OR

Selling SEIS shares within 3 years

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9
Q

How is Clawback done for SEIS Shares?

A

-Income Tax Relief withdrawn and Tax liability increases in year of withdrawal by lower of: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

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10
Q

Exception to Clawback

A

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
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11
Q

What is Enterprise investment scheme (EIS)

A

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

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12
Q

Conditions for investors to qualify for EIS tax relief

A
  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
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13
Q

EIS tax relief 1: Income Tax Relief

A

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

  • Tax liability of current + previous year
  • 30% of investment
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14
Q

EIS tax relief 2: CGT Re-investment relief

A

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

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15
Q

EIS Tax relief 3: CGT on sale of EIS shares

A

-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.

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16
Q

What triggers Clawback of EIS Relief?

A

Investor becomes non-qualifying due to:

  1. Becoming an employee or director
  2. Exceeding 30% ownership
  3. Investing > £1,000,000

OR

Selling EIS shares within 3 years

17
Q

How is clawback done?

A

-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

18
Q

Exception to clawback

A

Holding SEIS shares for 3 years, if sold after 3 years:

  1. No withdrawal of Income Tax Relief
  2. Deferred gain will get chargeable
  3. Gain on sale of SEIS shares exempted
19
Q

What is VCT

A

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

20
Q

Why is investor’s risk lower in VCT

A

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

21
Q

VCT Relief 1: Income tax relief

A

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.

22
Q

Maximum Investment Limit in VCT Shares

A

200,000 per year

23
Q

Holding Period Requirement for VCT

A

5 years.

24
Q

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

A

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

25
Q

CGT Reinvestment relief on VCT shares

A

There is no CGT Reinvestment relief.

26
Q

Disposal of VCT shares implication

A

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

27
Q

Dividend income from VCT shares

A

EXEMPT from income tax