EIS Tax Benefits Example
1. If you invest £100,000 from a capital gain realised this tax year, you can get:
a) An income tax rebate (assuming you paid enough income tax) of up to 30% – £30,000
b) A CGT deferral relief of your capital gains of up to 28% – £28,000.
On exit after three years or more, this gives:
a) Successful Exits
This leaves the initial net cost of investing at £42,000 (42p in the £) although the £28,000 CGT deferral relief becomes due on exit so the overall cost is £70,000 (70p in the £) but there is the initial cash flow benefit of the CGT delay.
So, if an investment of £10,000 returned the initial amount invested on exit, you would have generated a gain of just over 1.4 times the net cost of investment (the net cost was £7,000). If an investment sold for three times the investment cost (£30,000), then the capital gain of £20,000 is CGT free.
b) Investment Fails
if an investment fails, then you receive loss relief at your marginal tax rate on the amount invested less the income tax relief received.
So, if an investment of £10,000 was made in a company and £3,000 was received back in income tax relief, the loss relief would be £3,150 if you are a 45% tax payer (£10,000 less £3,000 income tax relief multiplied by 45%). This gives a £3,850 net overall loss where £10,000 was invested and then received tax reliefs of £6,150. If you are a 40% tax payer, the loss relief would be £2,800 (£10,000 less £3,000 income tax relief multiplied by 40%). This gives a £4,200 net overall loss where £10,000 was invested and received tax reliefs of £5,800. The deferred CGT liability becomes due but effectively this is wiped out through the loss relief.
2. If you invest £100,000 this tax year but do not have any chargeable gains, you can get:
a) An income tax rebate (assuming you paid enough income tax) of up to 30% – £30,000.
On exit after three years or more, this gives:
a) Successful Exits
This leaves a net cost of investing of £70,000 (70p in the £).
So, if an investment of £10,000 returned the initial amount invested on exit, it would have generated a gain of just over 1.4 times the net cost of investment (the net cost was £7,000). If an investment sold for three times the investment cost (£30,000), then the gain of £20,000 is capital gains tax-free.
b) Investment Fails
if an investment fails, then you receive loss relief at your marginal tax rate on the amount invested less the income tax relief received.
So, if an investment of £10,000 was made in a company and £3,000 was received back in income tax relief the loss relief would be £3,150 if you are a 45% tax payer (£10,000 less £3,000 income tax relief multiplied by 45%). This gives a £3,850 net overall loss where £10,000 was invested and then received tax reliefs of £6,150. If you are a 40% tax payer, the loss relief would be £2,800 (£10,000 less £3,000 income tax relief multiplied by 40%). This gives a £4,200 net overall loss where £10,000 was invested and received tax reliefs of £5,800.
Summary
| Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | |
|---|---|---|---|---|
| Investment Amount | £10,000 | £10,000 | £10,000 | £10,000 |
| Tax Incentive 1: Income Tax Relief at 30% | (£3,000) | (£3,000) | (£3,000) | (£3,000) |
| Tax Incentive 2: Capital Gains Tax wipe-out relief at 14% | (£2,800) | n/a | (£2,800) | n/a |
| Net cost to Investor | £4,200 | £7,000 | £4,200 | £7,000 |
| Exit Realisation | £20,000 | £10,000 | n/a | n/a |
| Tax Incentive 3: Tax free capital gains | £ – | £ – | n/a | n/a |
| Tax Incetive 4: Inheritance tax relief | £ – | £ – | n/a | n/a |
| CGT deferral recovery on exit / failure | £2,800 | £ – | £2,800 | n/a |
| NET GAIN/(LOSS) TO INVESTOR | £13,000 | £13,000 | (£3,850) | (£3,850) |
| Gain percentage on net cost | 355% | 200% | n/a | n/a |
| Loss percentage on investment amount | n/a | n/a | (38,5%) | (38,5%) |