Income tax relief on investment/dividends

EIS

Individuals can currently obtain an income tax credit of 30% on a maximum investment of £1m in cash for newly-issued shares in a single tax year. The maximum income tax relief is, therefore, £300,000. The credit is set off against the individual’s tax liability but he or she must have an income tax liability sufficient to cover the credit in order to obtain the relief in full. The relief can only reduce the income tax liability to nil.

An individual may carry back any EIS income tax relief arising at any time in an income tax year, to the previous income tax year. This is subject to the overall cap for each income tax year, and subject to the individual having sufficient income to utilise the relief.

Income tax relief will be partially or wholly withdrawn if the relevant shares are disposed of within three years of acquisition or within three years of the company starting to trade if later, or if the investor or company ceases to qualify within that period, or if the investor receives value in that period or the 12 months prior to the share issue.

Income tax relief will not be withdrawn if the company becomes quoted within three years of the qualifying investment, so long as this was not part of a pre-arranged scheme. Dividends from EIS companies are taxable in the normal way.

SEIS

The rate of income tax relief is 50% on a maximum annual investment of £100,000 each tax year. A one-year carry back facility is available. Income tax relief is given as a credit against the individual’s income tax liability for the year of subscription.

Income tax relief will be partially or wholly withdrawn if the SEIS shares are disposed of within three years of the date of issue, the investor receives value in that period, or the relief is subsequently found not to have been due.

Dividends are taxable in the normal way.

 

VCT

The rate of income tax relief is 30% on a maximum annual investment of £200,000 each tax year. No carry back facility is available. Income tax relief is given as a credit against the individual’s income tax liability for the year of subscription.

Income tax relief will be withdrawn if the VCT ceases to qualify within five years of the issue of shares or if the shares are disposed of within five years of issue.

Dividends in respect of up to £200,000 of VCT investment a year are free of income tax. This, unlike the income tax relief on subscriptions, is also available on ‘second-hand’ shares as well as newly issued ones.

An overview of the tax incentives.

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Adrian Walton Smith & Williamson
Adrian Walton

Partner London +44 (0)20 7131 4180

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