Taxation and Enterprise Investment Scheme tax incentives – SEIS & EIS
Fastr is raising £2.5m and is expecting to be a qualifying company for Enterprise Investment Scheme (EIS) relief.*
This brings with it some major advantages to investors in the company, including:
- 30% income tax relief on up to £1 million in each tax year;
- Capital gains tax deferral of unlimited gains from other sources if the EIS investment is made within 1 year before or 3 years after the date of the disposal which gives rise to the gain;
- No capital gains tax payable on the disposal of shares in qualifying EIS companies;
- 100% inheritance tax relief after two years, provided the company has traded through the period and continues to do so;
- Income tax relief in respect of losses – A loss on any individual qualifying investment within the portfolio can be off set against an investor’s individual income in the tax year of the loss.
Comparing tax-efficient investment options
The three schemes usually compliment more conventional saving and investment wrappers such as ISAs and personal pensions.
*Illustrations on relief are available under the Enterprise Investment Scheme included on the next page. Investors should take independent financial advice in relation to EIS eligibility before making an investment.
Tax effect on mainstream investment
If they were to invest the capital gain in a typical mainstream investment and get 5-6% growth for five years, then £1 invested becomes £1.34, but after IHT, that will only be worth 80p. (The example assumes IHT at 40%, and that the IHT allowance has been used up elsewhere)
Relief effect on losses
The reliefs mean that even a total loss only results in a new loss of 39p per £1 invested. The relief is granted against the net cost of investment, not the gross cost, so it is 45% x 70p = 31p relief (assuming this is an additional rate taxpayer).
Relief effect on EIS investment
£1 Initial investment
However, if it was invested in an EIS, the ITR, CGT deferral and IHT relief transform the profile of that £1 invested. The net cost of investment is only 42p, and the entire portfolio value of £1.34 (assuming some growth) can be passed on to beneficiaries as part of the estate. In fact the value of the three reliefs (Income Tax, CGT deferral and IHT relief) adds up to more than the initial £1 investment.
Return based on Fastr financial projections
Based on an investment of £2.5m for 8% equity stake and fastr meeting its financial projections at the end of year 5 the company will have a value of £435m. This equates to 13.9 x return coupled with the 30% ITR at the start will result in £14.20 returned for every £1 invested.
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