EIS and SEIS

the_learner · 10 August 2017 at 9:15PM

Hi,

After having abandoned the idea to buy a house, I am currently trying to find the best allocation to my money.
My total income this year is expected to be a bit above £100,000 so apart from my marginal 40% income tax and 2% NI I will see my tax free allowance reducing by £1 for every £2 extra income I earn.
Effectively, this will correspond to paying a whooping 62% for any £1 I get from my investments generating income.

I have filled my ISA allowance and increased my pension contributions so now I need to allocate cash for about £50,000.
Most of this is already in P2P loans and the rest in some high interest bank account or regular saver. All these will get charged 62% tax.

I was lookimg for alternatives and found EIS and SEIS. What is the best way to use these?
I see that investing, for example, £10,000 I can reduce my tax bill by £5,000 (in case of SEIS) which is very nice.
Given the high risks involved, what are the best ways to diversify this risk and leverage the tax efficient treatment?

Any suggestion would be really appreciated.

Dazed_and_confused · 11 August 2017 at 9:58PM

Isn't increasing pension further going to be better from a tax perspective?

Looking at gov.uk SEIS relief is a tax credit so will not reduce your income.

So pension could be 60% effective (total of tax relief and getting all of your Personal Allowance back) whilst SEIS is 50% (which is still good of course, risks associated accepted).

the_learner · 11 August 2017 at 10:00PM

It is just that for pension I need to wait more than 20y... a SEIS could become selleable in 3/5y if things go well.

Dazed_and_confused · 11 August 2017 at 10:10PM

True. As the saying goes don't let the tax tail wagging the dog!!

HappyHarry · 11 August 2017 at 10:20PM

EIS and SEIS are very high risk investments.

EIS and SEIS are very attractive to those looking to defer capital gains tax and/or benefit from business property relief on inheritance tax.

If these benefits are not relevant, then VCTs would normally be preferred, due to their (generally) less excessive risk of capital loss.

the_learner · 11 August 2017 at 10:23PM

HappyHarry wrote: »

EIS and SEIS are very high risk investments.

EIS and SEIS are very attractive to those looking to defer capital gains tax and/or benefit from business property relief on inheritance tax.

If these benefits are not relevant, then VCTs would normally be preferred, due to their (generally) less excessive risk of capital loss.

Thanks. Can you please give an example of platform I can use to get exposure to VCTs and benefit from tax relief?

HappyHarry · 11 August 2017 at 10:32PM

the_learner wrote: »

Thanks. Can you please give an example of platform I can use to get exposure to VCTs and benefit from tax relief?

Most, if not all VCTs are directly purchased from providers rather than through platforms. They are not products with a significant secondary market, and so there is limited advantage to platforms for providing access.

I'm sure you understand that nobody on these forums will be able to advise on the pros and cons of any specific VCTs. Each has its own specialties and underlying investments.

If you're going to invest in this area, I would suggest you either do a lot of reasearch, or employ an IFA.

the_learner · 11 August 2017 at 11:47PM

Yes, sure. But just to see if I understand correctly how this all works.
My estimated income tax bill for this year is about £35,000.
Now assume I invest today in a VCT that has a minimum investment of £5,000 (just saw some on HL and BestInvest). The tax credit is 30% of the investment so in this case when I compile the tax return for this year I can declare that I invested £5,000 and I should get the 30% of £5,000 off my tax bill?
So given that this year I pay £35,000 in taxes will I get reimbursed for £1,500?
Also, I see I have to keep invested for at least 5y. If the 30% tax credit is only for the first year is there any income tax benefit in the following years? Or is it just the benefit of getting tax free dividends?

HappyHarry · 12 August 2017 at 6:51AM

By investing £5000 in a VCT, You would get a refund of £1500 from HMRC.

No CGT to pay on sale of the VCT.

No Income Tax to pay on dividends from the VCT.

Must be kept for five years else initial tax benefit is lost.

bowlhead99 · 12 August 2017 at 1:14PM

the_learner wrote: »

Yes, sure. But just to see if I understand correctly how this all works.
My estimated income tax bill for this year is about £35,000.
Now assume I invest today in a VCT that has a minimum investment of £5,000 (just saw some on HL and BestInvest).

Yes, with you so far, but at this point I should interrupt you to recommend Clubfinance over HL, because they will generally take lower commission for themselves. Even if the waived commission on the initial purchase amount is the same, there will generally be ongoing trail commission each year which HL would keep all for themselves while Clubfinance would pay you a decent slice (e.g. 75% of the 0.25% - 0.5% a year)

The tax credit is 30% of the investment so in this case when I compile the tax return for this year I can declare that I invested £5,000 and I should get the 30% of £5,000 off my tax bill?

Yes, e.g. you can make the investment in March and then on 6 April you can fill out your year end tax return for 2017/18 to say that you'd made the £5,000 contribution during the year and you'll probably get paid out the £1,500 within a few weeks.

VCT is a much quicker process than EIS / SEIS because with those you don't qualify for the tax relief simply by putting up the cash; you are investing in an individual company and have to wait until they formally issue shares to you *and* they commence activities and the HMRC agree with them that the issue of shares qualifies for relief because the company qualifies for that status based on the activities it's just commencing, and allows them to issue a certificate stating that... which they have to send to you and you have to have it in your hand before you can do a tax return to do the claim. That could take best part of a year.

VCT is much more straightforward because you just state on your tax return that you paid an aggregate amount of £x into VCT(s) and they don't care whether that money has been deployed into underlying portfolio companies yet.

So given that this year I pay £35,000 in taxes will I get reimbursed for £1,500?

Yes.

If you'd done £120k of VCT this year you would be hoping for a 30% reimbursement of £36,000 which is more tax than you actually owed, so you wouldn't get the last £1000. But where the relief is way lower than the total tax bill for the year, there is plenty of headroom to get the relief.

Also, I see I have to keep invested for at least 5y. If the 30% tax credit is only for the first year is there any income tax benefit in the following years? Or is it just the benefit of getting tax free dividends?

The tax credit is for giving up your income to make an investment in new issue of venture capital trust shares, and not selling them for at least five years (if you sell them in that timescale you have to give them back the initial 30% relief you took).

As a side note, in practice most serious investors would want to hold for longer than five years as it might take double that time for the money to be invested into portfolio companies, the portfolio companies be developed, and then exited. If you want to exit at the five year point, you have to find someone to buy your shares. What they're willing to pay you is likely to be a steep discount to NAV - because that someone would have to prefer to invest in your shares over investing in a new VCT issue which would give them 30% instant income tax relief, which is only going to happen if your VCT has a strong portfolio or can be picked up for a decent discount to NAV.

So rather than selling out at a crazy discount to NAV after five years, most people would hold for longer to actually get some decent investment gains and recover their money through dividends or a wind-up at very close to NAV.

But anyway...

You might decide to invest £5000 into VCTs in 2017/18 and get £1500 income tax relief knocked off your tax bill that year. If you decide not to invest any more money in 2018/19, you won't get income tax relief knocked off your tax bill for that year as you haven't made any qualifying investments.

But as you say, any dividends that the VCT sends you will always be tax free regardless of your annual dividend allowance or tax band, and the buys / sells will be excluded from your CGT calculations.

the_learner · 12 August 2017 at 2:54PM

Thank you, I think the process is quite clear now.
Only 2 more questions if I can ask.

1) Tax year for 2017/18 end at the beginning of April 2018. Suppose I make my VCT investment by that date. When am I supposed to fill my tax return to declare all my incomes (apart from salary that is already net of taxes) for the fiscal year 2017/18?

2) I see that on VCT dividends and capital gains I pay no taxes. But what if my total income from salary is £100,000 so that every extra £2 of income (in whatever form) is lowering my tax free allowance by £1?
Do the VCT dividends contribute to increasing my total income for the purpose of defining the size of my tax free allowance for the fiscal year?
If so, effectively I am paying some taxes on those dividends.

Thank you for sharing your experience.

EIS and SEIS

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