What is the Enterprise Investment Scheme (EIS)?

(Yogesh) #23

Bit confused reading guidelines. It says ‘The general rule is that the relief is available for the tax year in which the shares are issued. But if you choose, you can treat some or all of the shares as issued in the previous year and claim relief in that previous year’
So taking example if investment was done 2019-20 of £10k. Can I not claim £5k in 2018-19 and £5k in 2019-20?
https://www.gov.uk/government/publications/enterprise-investment-scheme-income-tax-relief-hs341-self-assessment-helpsheet/asdg#tax-relief-for-a-different-year--your-choices

(Vladislav Kozub) #24

I suppose ‘some’ means some other company’s shares. When I did my EIS3 for Freetrade, an HMRC technician, who helped me fill it, said I could only elect one of the tax years, in my case, 2018/2019 or 2017/2018. But then again, I don’t know if it is a universal rule or whether HMRC will be fine with you ticking both years on the form.

(Alexander Saunders) #25

I first of all want to state as a disclaimer that this isn’t professional advice so as to cover my back. However I work in Personal Taxation with a top 10 accountancy firm, and you most definitely can split the relief over the year of subscription in the EIS shares and the prior year even if you invest in only one company. Furthermore, just in case people don’t know because I see no mention of it here there is CGT deferral relief, if you sell an investment and make a capital gain on it and then invest those proceeds in EIS shares you can defer the gain to future years so that you don’t need to pay CGT until later.

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(Yogesh) #26

Thanks. That’s impression guidelines give.

This is part not clear to me.

  1. If you are making EIS investment you anyway get 30% relief.
  2. What’s advantage of deferring CGT? Can’t you claim 30% relief? Or EIS relief doesn’t apply to CGT?
(Alexander Saunders) #27

There are three reliefs available when you make an EIS investment. Two are available at the time of subscription, one is available at the time of disposal of the EIS shares.

At subscription the reliefs are Income tax relief and deferral relief. The income tax relief as mentioned provides a tax reducer at 30 percent of the amount subscribed. So if I had subscribed to 100 shares for 100 pounds I would get a tax reducer of 30 pounds. This is available in the year of subscription or the preceding year and can be split between the two however you like. 10 in one year 20 in the other. Or 15 in both and so on. The other relief available, deferral relief, allows you to defer the gain on the disposal of any asset up to the amount subscribed in the EIS shares. So for example I have some gold and make a capital gain on it in the 2016/17 tax year, the gain is 12,000 pounds and I have none of the annual exempt amount remaining so it would all be chargeable to capital gains tax. For every pound invested in EIS shares you can freeze the capital gain on the asset disposed of. So if I invested 100 pounds in EIS shares I would freeze 100 pounds of the gain on the gold and would only need to pay CGT on the remaining 11,900 pounds. The remaining 100 would become chargeable to CGT when the EIS shares were disposed of or when they ceased to be EIS shares.

The third relief is the disposal relief which exempts the disposal of the EIS shares from CGT providing they have been held for a period of three years and are still qualifying EIS shares.

Hope that makes sense and I apologise for the terrible writing. I am replying from my mobile which isn’t easy.

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#28

As far as I’m aware an investment in EIS is exempt from capital gains tax if you hold it for 3 years. That is a huge advantage in addition to the 30% income tax relief. Effectively makes it an ISA.

Crowdcube has a good overview.

https://www.crowdcube.com/pg/eis-tax-relief-for-investors-44

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(Yogesh) #29

Thanks for response. So against one EIS investment you have both income tax relief as well as deferral relief for other CGT gain?

Lets take one example. £10000 EIS investment made in 2017-18 in Company A & income tax relief was claimed for 2017-18. Company A was acquired in 2018-19 and £40000 was returned to shareholder. Assuming CGT tax free allowance already used in 2018-19, are below options look ok(there may be more options as well but are below correct)?

  1. Pay CGT on £30000 gain
  2. EIS Investments of £30000 in 2018-19. Use Income tax relief to claim £9000 relief and offset CGT on £30000 gain(depend upon personal tax bracket)
  3. EIS Investments of £30000 in 2018-19. Use Income tax relief to claim £9000 relief(assuming you have liability apart from this gains) and still use same £30000 EIS investment to defer CGT
(Alexander Saunders) #30

You are correct. Two reliefs at the time of subscribing to the EIS shares (deferral and income tax relief), and the final disposal relief provided the shares are held for the three year period. This is of course on the basis that the shares remain as EIS shares.

Just a further bit of info on the deferral relief. It can relate to gains in the period that runs from three years prior to the subscription in the EIS shares to one year after the date of subscription. So if you subscribed to EIS shares in May 2018, any disposals in the three years preceding the date of subscription would be eligible for relief, and any disposals made up to one year after the date of subscription would also be eligible. Unlike the Income Tax Relief there is no maximum on the amount of relief that can be claimed, it’s limited only by the amount you subscribe.

Sorry, but I’m a bit confused by the options you mention. But I have had a go at responding.

Option 1: So you are correct, as the EIS shares have been held for less than three years before the disposal, you would be required to pay Capital Gains Tax on the resulting gain. Furthermore as the shares were disposed before the three year limit, there is ‘claw back’ of Income Tax relief. So the original income tax relief that you received in 17/18 as a result of the investment would be withdrawn. I am not 100% certain, but I think as the disposal was the result of a takeover the company would no longer be a qualifying company for EIS, so you would have 100% of the Income Tax relief withdrawn.

Option 2: Do you mean you make an additional EIS investment in 2018/19 of £30,000? If so, you are correct you can use the relief to offset the gain on the disposal of the EIS shares acquired in 2017/18. However I believe the Income Tax relief would be withdrawn as above.

I’m sorry but I’m not sure I understand the difference between option two and three. I hope my above responses are clear.

(Yogesh) #31

Thanks. your response are clear.
Only difference I was trying to show in Option2 & 3 was Option 2 income tax relief of new investment used to offset CGT and in Option3 both income tax relief and deferral relief used of new investment.

(Alexander Saunders) #32

Ah, okay. You don’t use the Income Tax relief to offset the CGT. The Income Tax relief is only available against Income Tax. So if you made a new EIS investment in 2018/19, you can use that to provide Income Tax Relief, or deferral relief, or both. It’s entirely your choice in claiming the reliefs. The Income Tax relief and the deferral relief are both available at the same time, there is no requirement to choose one or the other.

#33

Thanks Alex. To be honest, I did not know about the CGT relief. Your example uses the capital gain to invest in EIS shares to benefit from CGT relief which I get. I wonder if the relief available would be available if I invested in EIS shares in the beginning of tax year and at the end of tax year made the capital gain? So basically the EIS investment takes place before the capital gain is realised but they are in the same tax year.

(Alexander Saunders) #34

Yes it would but only up to a period of 1 year after the investment in the EIS shares.

So if you invested in EIS shares on 19th May 2018, you would need to make the disposal by 19th May 2019 to be eligible for the deferral relief.

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(IRINA KOZLOVA) #35

Hi All, I have a slightly niche question on claiming EIS Income Tax relief on qualifying shares I purchased in Aug 2018 (i.e. tax year 2018/2019). I am no longer tax resident in the UK for the tax years 2018-2019 nor will I be for 2019-2020 (as will be tax resident in Hong Kong again). I therefore do not want my relief to be allowed in my PAYE coding (which is the main option for those of us on in full time employment where employer uses PAYE which is the case for me), but thinking of choosing the option to claim relief for 2017-2018 (i.e. previous tax year) where I still was tax resident in the UK as I understand that if I claim relief but my tax liability isn’t high enough to absorb all the relief (which is the case for years 2018-2019 and will be for 2019-2020) I have to forgo the excess.

Given I have paid tax via PAYE in year 2017-2018 already, how does claiming relief in that year then actually work in practical terms? Will HMRC send me a tax rebate for that year?

I think I don’t actually fill out any self-assessment or the like as only pay tax via PAYE so apart from sending in the EIS claim for to HMRC re claiming relief in 2017-2018, is there anything else I need to do?

Thank you in advance for any suggestions!
Ira

(Alexander Saunders) #36

Sorry for the late reply. I have been quite busy. Also I want to preface this by saying this isn’t professional advice.

Well I work on Returns for people in Self Assessment and am still in the process of training, so I am not too sure on the intricacies of claiming for relief for someone that isn’t in Self Assessment. However you mention that the relief is normally included in someone’s PAYE code, so I presume you make a claim via the claim form included in the EIS3. On the basis that the claim is made via the form EIS3 as for an individual in Self Assessment, I would imagine you would need to fill in the claim form to claim the relief in the prior year and HMRC will then make you a repayment. If the relief available is more than the tax you paid in the prior year then HMRC won’t make a repayment for the full amount of relief, just the amount you paid. You would gain no benefit in putting the full claim against your prior year liability in that case, so if that is the case you can put an amount of relief equal to the tax paid and put the rest against the liability from the year of investment.

Does that help?

(IRINA KOZLOVA) #37

Yes it does. Thank you Alex. I am still not quite following what the repayment will look like though. Is it literally a cheque or bank transfer from HMRC directly to me (i.e. not going through PAYE or my employer)? Thank you for your assistance!

(Yogesh) #38

When I claimed SEIS by filling form few years back, they sent me cheque

#39

If you do a self-assessment return I think it’s usually “repaid” in the form of a reduction in the amount of tax you pay to HMRC.

(Alexander Saunders) #40

For my clients that are in Self Assessment, there is a box that is ticked on their Return to ask to be given a refund. If this isn’t ticked then the amount is held on account to offset any future liabilities. You can then provide bank details in the Return for the repayment to be made to, or if you include none you get sent a cheque to the address HMRC has on file for you. I am not sure for someone not in Self Assessment, but I can’t imagine they would hold it on account.