Venture Capital Schemes and Mitigating a High Tax Bill

You may be finding yourself with a high tax bill coming, and a common way to mitigate such a bill, is investment in a Venture Capital Scheme. There are few options, but lets look at the two most common, and what tax reliefs would be available.

EIS

The EIS offers income tax relief at 30% on the investment in newly issued shares in unquoted trading companies. An investor can subscribe for shares worth a maximum of £1 million per tax year (£2m if the company is a knowledge intensive one) and must hold the shares for a minimum of three years otherwise there will be a clawback of the income tax relief received. The investor can elect to carry back the investment by one tax year so that relief is received in the earlier year.

On a sale of the shares after three years, any gain will be completely exempt from CGT providing a claim for income tax relief has been made and not withdrawn. There is also the ability to defer CGT arising on the sale of other assets.

Additionally, EIS shares automatically qualify for share loss relief, after adjusting for the income tax relief given and not withdrawn.

CGT deferral

One of the most useful benefits of investing in EIS qualifying companies is the ability to defer capital gains arising on the sale of other assets. Where the proceeds from an asset sale are reinvested into EIS shares within the permitted window, an investor may elect to defer an amount of the gain from being subject to tax.

For every £1 invested into EIS shares, £1 of gain may be deferred.

The deferral window starts one year before, and ends three years after, the date the gain you want to defer arises.

The gain on disposal of the asset is calculated in the usual way but is then frozen upon the making of a claim for deferral and is only brought into charge on a later sale of the EIS shares. A deferral claim is made by completing the EIS3 compliance certificate that will be issued once HMRC has confirmed that the investment qualifies.

As death is not a chargeable event for CGT purposes, if the EIS shares are held until your death, the deferred gain will escape a CGT charge.

VCTs

VCTs also offer income tax relief at 30% on the investment in newly issued shares, although the amount of shares that an investor can subscribe for is much lower at only £200,000 per tax year and the shares must be held for a minimum of five years. There is no ability for the investor to carry back the investment to the previous tax year, but any dividends received on the shares will be exempt from income tax.

Any gain on the sale of VCT shares will also be exempt from CGT, but unlike with the EIS there is no set holding period therefore shares can be sold at any time and be free of CGT. On the flip side any loss triggered on the sale of VCT shares will not be an allowable loss.

To Summarise

The EIS, enterprise investment scheme can be used to offset income tax and defer capital gains tax. It also has the added bonus that the shares should qualify for business property relief after two years. VCT’s Venture capital trusts offer a more limited income tax relief, but dividends are exempt from tax - meaning they can be used like an ISA, with a larger annual investment limit.