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How much will tax relief reduce my EIS losses?

How can tax relief relieve the blow of losses in young companies?
How much will tax relief reduce my EIS losses?

I have around 18 investments in Enterprise Investment Scheme (EIS)-qualifying companies via a manager. Three of the companies now have nil value. I am a higher-rate taxpayer.

My investment in these three companies was £20,000. I received tax relief of 30 per cent - so £6,000. I also received capital gains tax (CGT) deferral relief on a residential property capital gain of £5,600. Do I get further tax relief of 45 per cent on £14,000 or £8,400? If it is the higher figure, is the position the same for a Seed EIS (SEIS) investment, as I think I would then effectively get all my money back via tax reliefs? AG

Alex Davies, founder and chief executive of Wealth Club, replies:

You state that you have invested £20,000 in total into three EIS companies that have failed and gone to zero. When you invested you would have received up to 30 per cent income tax relief, so the effective cost of this investment is £14,000. You also said you used the investment to defer a CGT bill of £5,600 from a property sale, which would suggest your capital gain from the property sale was £20,000 taxed at 28 per cent.

You are seeking clarification on how the loss relief works and how it compares to SEIS.

You should be able to claim loss relief on £14,000. The value of the relief will be between 20 per cent and 45 per cent, depending on the rate of tax you pay. This means for a top-rate taxpayer, despite a £20,000 investment going to zero, their effective loss would be £7,700 once all the tax reliefs have been taken into account. £20,000 - £7,000 income tax relief – loss relief of £6,300 (45 per cent of £14,000) = £7,700.

The deferred capital gains from the property sale will come back into charge because the EIS companies have failed. If you want to continue deferring the gain, you could invest a further £20,000 into some other EIS-qualifying companies. Or you could just pay the bill.

With EIS invesments, you have the choice of writing off losses against either income tax or CGT, so if you wanted you could offset the bill from the previously deferred capital gain in this way. But then you wouldn’t be able to claim that loss relief against your income, which is likely to be higher.

SEISs work slightly differently. Firstly, you get 50 per cent income tax relief. And rather than the capital gains deferral option available under EIS, with SEIS you can actually wipe out 50 per cent of your CGT bill. So let’s suppose you invested £20,000 into an SEIS. Because of the income tax relief of 50 per cent, the effective cost to you would be £10,000. You have said your CGT bill was £5,600. You could wipe out half of this (£2,800) by investing in SEIS. Your investment of £20,000 into a SEIS company would effectively cost you £7,200.

If the SEIS value goes to zero, a top-rate taxpayer could then claim up to 45 per cent loss relief on losses minus income tax relief. So in this case you could claim up to £4,500 in loss relief.

When you take into account the initial income tax relief of £10,000, 50 per cent CGT relief of £2,800 and loss relief of £4,500, the effective loss on your £20,000 investment, despite it going to zero, would be just £2,700 – a 13.5 per cent loss.

Below are some examples of loss relief on £100,000, which may be simpler to understand.

EIS:

Initial investment

£100,000 

Income tax relief

£30,000 

Value of investment on exit

£0 

Loss relief (45% taxpayer)

£31,500 

Gain/Loss after all tax reliefs

(£38,500)

  

SEIS: Maximum loss of as little as 13.5 per cent – an example

Initial investment

£100,000 

Income tax relief

£50,000 

Capital gains tax relief (CGT at 28%)

£14,000 

Value of investment on exit

£0 

Loss relief (45% taxpayer)

£22,500 

Gain/Loss after all tax reliefs

(£13,500)