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Information for Professional Advisors

There have been many changes affecting the personal investment industry over the last 20 years including a number of tax incentives to encourage wider investment provision by the individual for their own benefit.  In today’s environment, tax-efficient investments are more limited, in particular, those related to pension schemes.   The EIS and SEIS schemes are now the only UK tax efficient investments to offer Capital Gains Tax (“CGT”) Deferral Relief.  With the changes to the maximum level of contributions to pensions, investors may wish to consider alternative investments, such as EIS, SEIS and VCTs, alongside their pensions.

The following table sets out where the EIS and SEIS sits in comparison to other tax efficient investments, by way of illustration but please bear in mind these will depend on individual circumstances and the notes refer to the relevant section for each tax relief.  It is possible there will be changes to the SEIS, EIS and VCT in the Budget on 22 November 2017.

UK Tax-efficient Investment Comparison Table

 

VCT

ISA

Pension

EIS

SEIS

Income Tax Relief

30%

Nil

Up to 45%

30%

50%

Capital Gains Deferral

Nil

Nil

Nil

Up to 28% (A)

 

Capital Gains Reinvestment Relief

Nil

Nil

Nil

 

Effective relief up to 14% (B)

IHT Relief

No

No (C)

Yes (D)

Yes after 2 years

Yes after 2 years

Tax Free Exit

Yes

Yes

Yes/No

Yes/No (E)

Yes after 3 years

Tax Free Dividends

Yes (F)

No

N/A

No (F)

No (F)

Limits 2016/17 and 2017/18

£200,000

£15,000

Up to 100% of earnings or £40,000 (carry forward may also be available) (G)

£1M (H)

£100,000 (I)

Min Holding Period

5 years

None

To age 55+

2 years for IHT  

3 years for EIS

2 years for IHT  

3 years for SEIS

(A) Gains arising before 6 April 2016 to higher rate UK tax payers are chargeable at 28%. From 6 April 2016 the rate is generally 20% (but remains at 28% for certain assets.) The relief is a deferral only, and not an exemption and the deferred gain will crystallise on sale of the EIS shares.

(B) SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100k ie for a gain of £100k reinvested in an SEIS investment, £50k of the reinvested gain is exempt.

(C) Some shares in AIM listed companies held in an ISA and held for at least two years may be eligible for IHT relief.  All shares held in an ISA are exempt from CGT.

(D) In certain circumstances.  Specific IHT advice is required

(E) There is no tax free exit for shares for which EIS deferral relief only was claimed.

(F) With effect from 6 April 2016 the 10% tax credit on dividends has been abolished and replaced with an annual dividend allowance (the dividend nil rate (‘DNR)).  The DNR charges income tax at 0% on the first £5,000 of an individual’s dividend income which would be chargeable to tax but for the DNR.  Chargeable dividend income above the DNR is chargeable to tax at basic, upper or higher rate dependent upon the tax rate which applies to the individual shareholder.

(G) Relief for pension contributions is complex and separate advice should be taken.

The 2015/16 tax year was split into two years, a ‘pre-alignment tax year’ which provides an annual allowance of £80,000 (plus any c/f from 14/15, 13/14; 12/13) for all pension savings ending on or after 6 April 2015 and on or before 8 July 2015.  From 9 July 2015 there is a nil annual allowance with up to £40,000 of the £80,000 added to that nil amount provided those individuals were members of a registered pension scheme during the period 6 April 2015 to 8 July 2015.  Those who were not will have an annual allowance of £40,000 for the period 9 July 2015 to 5 April 2016.

(H) Up to £1M of EIS investment may be carried back to the previous tax year if the limit for that year was not fully utilised.

(I) Up to £100k of SEIS investment may be carried back to the previous tax year if the limit for the year was not fully utilised.

For more information about EIS Funds and Portfolios please download the Factsheet for Professional Advisors here

For more information about EIS Tax Reliefs please download the EIS Factsheet Tax Reliefs at Work in a Fund here