Believe it or not, there are tax incentives worth investing in.
You may or may not have heard about VCTs, EISs, SEIS, SITR and REITs.
They look and sound confusing right? Let us explain.
The following will highlight five tax incentive investments for every entrepreneur to reap the rewards.
Venture Capital Trusts (VCTs)
- Dividends paid by VCTs are exempt from Income Tax, subject to an annual limit of £200,000 on the amount invested.
- Income Tax relief is available at 30% only to those who subscribe for shares.
- Shares in VCTs acquired within the annual limit are also exempt from CGT on disposal at any time, but losses on disposal are not allowable.
- Income Tax relief is withdrawn if various conditions are not met; these include a minimum holding period. Since 6 April 2006 the period has been five years.
Enterprise Investment Schemes (EISs)
- Income Tax relief is available at 30% on new subscriptions by individuals for eligible ordinary shares in qualifying unlisted trading companies (including shares traded on the alternative investment market (AIM).
- The maximum amount qualifying for relief in a single tax year is £1 million. Autumn Budget 2017 proposes an increase to £2 million if the excess over £1 million is invested in knowledge-intensive companies.
- Capital gains made on the disposal of other assets can be deferred by investment into the EIS, provided the EIS investment is made in the period starting twelve months before the date of disposal and ending 36 months after. A capital gain on the disposal of the shares after the minimum holding period of three years will be exempt from CGT provided that EIS Income Tax relief has been retained. Capital losses can be set against either capital gains or converted into an Income Tax loss.
- The full (or some) subscription can be carried back to reduce the tax liability of the previous year.
- If certain conditions are not met or cease to be met, tax relief can be withdrawn. The main condition is that the investment must be held for a minimum period of three years. The three-year period runs from the point at which the company starts to trade if that’s later than the date of the subscription to the shares.
Seed Enterprise Investment Scheme (SEIS)
- The relief is aimed at small start-up companies and will provide relief to investors similar to EIS. The scheme applies to shares issued on or after 6 April 2012.
- The maximum investment in a tax year is £100,000.
- All or some of the investment can be carried back and treated as if invested in the previous tax year.
- The rate of tax relief is 50% of the amount invested.
- Gains made on disposal of the SEIS shares are exempt from Capital Gains Tax provided they have been held for at least three years and Income Tax relief has not been withdrawn.
- For 2012/13 there is an exemption (not a deferral) for gains realised on the sale or transfer of assets that are invested in SEED shares.
- For 2013/14 and later years the exemption is half the gain reinvested.
Note. The time limit for 2017/18 claims is 31 January 2024 and that for 2018/19 is 31 January 2025, etc.
Social Investment Tax Relief (SITR)
- The relief gives individuals who invest in qualifying social organisations Income Tax relief of 30% of their investment.
- Relief to investors is similar to EIS, so there is also Capital Gains Tax deferral and disposal relief.
- No SITR will be available on any investment which the investor has previously obtained relief under EIS, SEIS or the Community Investment Tax Relief scheme.
- The maximum investment in a tax year is £1 million.
- All or some of the amount invested can be carried back to the previous year, but this first applies to 2015/16 as SITR cannot be allowed in a year earlier than 2014/15.
- The investment must be in newly issued shares or new qualifying debt.
Real Estate Investment Trusts (REITs)
- Corporation Tax relief (for the REIT) – liability reduced to 0% on qualifying rental income and gains where at least 90% of these are distributed.
- Qualifying distributions from REITs (broadly, the rental profits) are taxed on the investor as non-savings income. The REIT deducts tax at the basic rate when making the distribution. Any other distribution by the REIT i.e. other profits, will have the tax treatment of a normal dividend.
- Autumn Budget 2017 proposes various changes to the rules for VCT, EIS and SITR schemes including the following:
- That schemes are to be focused on companies where there is a real risk to the capital being invested. The change to be effective from the date of the Royal Assent to the Finance Bill
- The anti-abuse rule will be limited in application to mergers of certain VCTs. This measure is to have effect on VCT subcriptions made on or after 6 April 2014.
- Changes to EIS and VCT rules are designed to encourage further investment in knowledge-intensive companies.
For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.