Everyone works hard for their money, and due to the risk of loss, investing can be a daunting experience for many. Fortunately, an investment in both Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) companies offers loss relief. This incentive enables an investor to offset losses obtained against either their Income Tax or Capital Gains Tax (CGT) amount.
SEIS/EIS were both set up by the government to enable small start-up companies to attract their first round (and riskiest) of capital. With EIS, a company can raise up to £12 million and with SEIS the company can raise £150,000.
The incentive of SEIS/EIS for investors is the tax relief opportunities. For example, an investor will receive 30% income tax relief if they invest £100,000 in an EIS company and have a tax liability of £30,000, their income tax liability could reduce to zero. For SEIS, an investor will receive 50% income tax relief.
Income tax relief is just one of the incentives that EIS provides. An EIS investor can also get 100% CGT deferral relief when investing in an EIS company. Gains resulting from shares that are sold are 100% exempt from CGT! The schemes can also provide 100% inheritance tax relief for investors
What is Loss relief?
A lesser known incentive of SEIS/EIS is loss relief. If an investor buys shares in an SEIS/EIS company and the shares are sold at a loss, loss relief enables the investor to offset the loss against their income tax or CGT liability.
To calculate loss relief, deduct what the investor collected in tax relief from the amount they invested. Loss relief will not eradicate the entire damage, but it will soften the blow depending on the investor’s tax bracket.
When does an investor claim loss relief?
An investor can claim loss relief on the year of the loss, then offset the loss against their current tax bill or the one for the previous year. An investor can offset their relief against either income tax or CGT.
EIS loss relief example:
John would like to invest in an early stage company.
John decides to invest in a company that qualifies for both SEIS and EIS as he wants to understand the tax relief opportunities.
John invests £100,000 into ABC Technology which have qualified for both EIS and SEIS. ABC Technology has already raised £100,000 under SEIS (£150,000 being the maximum), so John invests 50,000 in SEIS shares and 50,000 in EIS. The tax relief benefits allow him to collect 50% of her investment back against his income tax for SEIS, which reduce his tax liability by £25,000 and 30% of the £50,000 under EIS which will enable him to reduce his tax liability by £15,000.
Due to a serious glitch in the ABC Technology product that couldn’t be corrected, the value of the investment unfortunately falls to zero. Taking away what John has already claimed on tax relief, this shows that he is at a net loss of £60,000 (£100k – £25k – £15k).
John wants to offset his loss against his income tax liabilities. For the tax year 2017/18 John earned £200,000, which means he is an additional rate taxpayer of 45%.
45% of the £60,000 loss that John obtained is £27,000.
John’s overall loss of his investment is £33,000 (£60k – £27k) and obtains a loss relief of £27,000 he can offset against his income tax which may not return his the full initial capital outlay of £100k, but it does ease the burden by £67k.
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