Looking at some examples of how these figures actually work in practice makes it easier to understand why it’s worthwhile to invest in EIS and SEIS schemes in the UK.
Income Tax Relief Sample
With EIS or SEIS, there is a 30 percent Income Tax Relief given upfront. For example: If an investor buys shares in a qualifying company in the amount of £100,000, the Income Tax Relief would equal £30,000. This makes the net cost of the EIS investment £70,000.
For qualifying investors, that income tax relief amount of £30,000 would be credited against the total income tax liability for the year when the shares are issued. One note here: The relief is available against a United Kingdom income tax liability, regardless of whether the investor is a resident of the UK. Additionally, the amount of tax relief cannot be more than the investor’s total income tax liability.
Another investment point to be aware of is the carry back provision; this allows an investor to use the tax relief benefit against taxes owed in the prior year, up to a maximum investment of £500,000, for a potential tax relief savings of £150,000.
Capital Gains Relief Sample
With EIS or SEIS, there is no capital gains tax due on shares purchased under the programs, provided they are held for three years.
For example: The realised value of your shares after three years is £250,000 less your original investment of £100,000. Your profit, which is not subject to capital gains, is £150,000. Investors must make a claim for income tax relief on the shares for the subsequent disposal of these same shares to qualify for exemption from capital gains taxes.
If you add these two examples together, that initial investment of £100,000 cleared the investor a tax-free £150,000 and a £30,000 tax relief upon purchase of the shares. So, in total, the investor would make a profit of £180,000 by using these tax relief schemes.