100,000
The Enterprise Investment Scheme
Working Examples
1. Income tax relief
Qualifying individuals can credit an amount equal to tax at the lower rate on the amount subscribed for eligible shares against their total liability to income tax for the tax year in which the shares are issued. For the 2010/11 tax year the relief is obtained at the lower rate of 20%. The relief is available against a UK income tax liability irrespective of whether or not the investor is resident in the UK. The amount of relief given cannot exceed an individual’s tax liability.
| Example | £ |
| Gross investment in shares | |
| Less: income tax relief at 20% | 20,000 |
| Net cost of investment | 80,000 |
A qualifying individual can claim to carry back part of their subscription to the previous tax year. The maximum amount which may be carried back is £500,000. In this instance, an individual can subscribe and claim for EIS benefits for up to £1,000,000 of EIS qualifying shares, in the current tax year.
2. Capital gains tax relief
To the extent EIS income tax relief is available and not liable to be withdrawn, any capital gain accruing to the original investor on the disposal of his shares shall be exempt from capital gains tax, provided that the shares have been held for at least three years.
| Example | £ |
| Realised value of shares after 3 years | 250,000
|
| Less: original gross investment | 100,000 |
| Tax Free Gain | 150,000 |
3. Loss relief
If the original investor disposes of his shares at a loss, the net loss (after EIS income tax relief) may be set against other taxable income or chargeable gains, at the election of the investor.
| Example | £ |
| Realised value of shares | 0
|
| Gross investment in shares | 100,000 |
| Less: income tax relief at 20% | 20,000 |
| Loss before tax relief | 80,000 |
| Tax relief at 40% * | 32,00 |
| Net loss | 48,000 |
*Assumed the net loss was offset against other income taxable at 40% as opposed to chargeable gains which are taxable at; 10%, 18% & 28%.
4. Capital gains tax deferral
The liability to capital gains tax arising on the disposal of any asset may be deferred by investing the gain in eligible shares. The investment must be made within the period beginning one year before and ending three years after the event which gives rise to the gain being deferred.
Although there is a limit of £500,000 for income tax relief and capital gains tax relief there is no limit on the amount of capital gains that can be deferred.
| Example | £ |
| Gross investment | 600,000 |
| Less income tax relief (20% of £500,000) | 100,000 |
| Cost of investment | 500,000 |
| Capital gains tax liability deferred* | 240,000 |
| Net initial cost of investment | 260,000 |
*Assumed at 40%, the gain is deferred until there is a chargeable event, such as a disposal of shares or, if earlier, a breach of the EIS rules.
The statements above are intended only as a general guide to the current position as at July 2010 under UK law and H M Revenue & Customs practice and may not apply to certain classes of person (such as dealers in securities). Any person who intends to seek to obtain EIS Relief in respect of his investment, or who is in any doubt as to his tax position, or who is subject to tax in a jurisdiction outside the UK, should consult his professional advisers.