ATXP6 UK
Syllabus A1. Income tax A1g. Exemptions and Reliefs for I.T.

A1gi/C1-4. EIS and SEIS Investment Relief

Syllabus A1gi/C1-4)

g) The use of exemptions and reliefs in deferring and minimising income tax liabilities:

i) Understand and apply the rules relating to investments in the seed enterprise investment scheme and the enterprise
investment scheme

and

C1. Identify and advise on the types of investmentand other expenditure that will result in a reduction in tax liabilities for an individual and/or a business.

C2. Advise on legitimate tax planning measures, by which the tax liabilities arising from a particular situation or course of action can be mitigated.

C3. Advise on the appropriateness of such investment, expenditure or measures given a particular taxpayer’s circumstances or stated
objectives.

C4. Advise on the mitigation of tax in the manner recommended by reference to numerical analysis and/or reasoned argument.

What are EIS and SEIS Investment Relief?

EIS and SEIS

If an qualifying individual invests in qualifying unquoted EIS/SEIS company shares, the amount invested can be used to reduce the individual's income tax liability.

There are conditions to be a qualifying investor, qualifying company and for the maximum amount of relief available.

EIS Relief

Conditions to be a qualifying investor

  1. Individual at least 18 years and must subscribe for newly issued shares.

  2. Must not own shares before the investment.

  3. Must own less than 30% of the shares.

  4. Must not be an employee of the company before making the investment, but can become a paid director of the company after making the investment.

Conditions to be a qualifying EIS company

  1. Maximum capital raised can be £5m in the last 12 months.

  2. Unquoted trading company or company quoted on AIM.

  3. Sound financial health and trading from permanent establishment 
    in UK.

  4. Assets gross before share issue ≤£15m and after ≤£16m.

  5. Funds raised must be used to grow the business.

  6. Funds must be raised during first 7 years of trading.

  7. Employees max 250.

Income tax implications

  1. In the tax year in which investor subscribes for the shares he can claim EIS relief at 30%. 

    This means that he can reduce his income tax liability by: (Amount invested *30%).

    EIS relief cannot create an income tax repayment it can only bring the bill down to £0. 

    The maximum relief that can be given is £300,000, therefore if more than £1,000,000 is invested, only £300,000 EIS relief can be claimed.

  2. Dividends received by investors from the EIS company are subject to income tax at 7.5%, 32.5% and 38.1%.

  3. This relief can be claimed in the current or previous tax year.

  4. If the EIS shares are sold within 3 years of ownership, the relief given will need to be paid back to HMRC.

Illustration

Tom is not an employee of A Ltd (an unquoted company) and owns < 30% of shares in A Ltd. 

Tom subscribes for 10,000 new ordinary shares in A Ltd for £30,000 on 30 June 2018. 

A Ltd. qualifies as an EIS company.

How much can Tom reduce his income tax liability by?

  • Solution

    Tom can reduce his income tax in the tax year in which he buys the Enterprise Investment Scheme shares (or the prior year) by EIS relief at 30%. 

    Tom can reduce his income tax by £9,000 (30% * 30,000) in 2018/19 or 2017/18.

SEIS Relief

An SEIS is similar to the EIS but is intended to promote investment in smaller early stage trading companies.

Conditions for investors in SEIS Companies

  1. Individual at least 18 years and must subscribe for newly issued shares.

  2. Must not own shares before the investment.

  3. Must own less than 30% of the shares.

  4. Must not be an employee of the SEIS company before making the investment but can become a paid director of the company after making the investment.

Conditions to be a qualifying SEIS company

  1. Maximum capital raised £150,000 in the last 3 years

  2. Unquoted trading company.

  3. Sound financial health.

  4. Start-up company.

  5. Employees no more than 25 full-time.

  6. Trading from a permanent establishment in UK.

  7. Assets before issue ≤£200,000.

Income tax implications for SEIS investment

  • In the tax year in which investor subscribes for the shares he can claim SEIS relief at 50% (tax reducer).

  • Dividends received by investors from the SEIS company are subject to income tax at 7.5%, 32.5% and 38.1%.

  • If investor sells the shares within three years the income tax relief is withdrawn - an adjustment will need to be made in the assessment for the year in which the relief was originally claimed. 

    The upper limit on SEIS relief is £50,000 (50% x 100,000) each tax year.

  • This relief can be claimed in the current or previous tax year.

Illustration

Tommy is not an employee of A Ltd (an unquoted company) and owns no shares in A Ltd. 

Tommy subscribes for 10,000 new ordinary shares in A Ltd for £30,000 on 30 June 2018 under the SEIS.

  • Solution

    Tommy can reduce his income tax in the tax year he buys the SEIS shares by SEIS relief at 50%. 

    Tommy can reduce his income tax by £15,000 maximum (50% x 30,000) in 2018/19 and / or 2017/18. 

    Tommy must repay the income tax saving to HMRC is he sells the shares within three years.