With 30% income tax relief,CGT deferral and tax-free growth, EIS can be a valuable tax planning tool. However, this type of planning is often left until the traditional rush to invest as the end of the tax year approaches. But when is the best time of year to invest?
Following recent changes, it is not uncommon for full deployment of EIS subscriptions to take 12 to 18 months. This needs to be taken into account by advisers who are rightly keen to maximise the tax reliefs by making use of them in targeted tax years.
As a result, investing earlier in the tax year is often a better option as evidenced by the case studies below.
Scenario A – client invests now:
- Mr Jones wants to offset a £30,000 income tax bill he has incurred in August 2018 while also starting the clock to become eligible for Business Relief.
- Mr Jones invests £100,000 in EIS in September 2018.
- £60,000 of the subscription is deployed into EIS qualifying investee companies before the end of the 2018/19 tax year
- The remaining £40,000 of the subscription is deployed into EIS qualifying investee companies during the 2019/20 tax year
In this example, there are over 18 months until the start of the 2020/21 tax year….
Scenario B – client invests at the end of the 18/19 tax year:
- Mr Smith wants to offset a £30,000 income tax bill he has incurred in August 2018 while also starting the clock to become eligible for Business Relief.
- Mr Smith invests £100,000 in EIS in March 2019.
- £10,000 of the subscription is deployed into EIS qualifying investee companies before the end of the 2018/19 tax year
- £60,000 of the subscription is deployed into EIS qualifying investee companies during the 2019/20 tax year
- The remaining £30,000 of the subscription is deployed into EIS qualifying investee companies during the 2020/21 tax year
- Mr Smith can only offset £21,000 of the £30,000 income tax liability. This is because only 70% of his £100,000 subscription to EIS was deployed in the tax year the liability was incurred, or in the following year.
Of course, the £30,000 deployed in 2020/21 could be used to offset other income tax liabilities incurred in 2019/20 or 2020/21, but that wasn’t the original plan.
In conclusion, the longer you leave it, the less likely it is that the entire subscription can be used to offset taxes in the current year; even taking into account that EIS has a carry-back facility allowing funds invested in one tax year to be applied to relieve income tax incurred in the previous tax year.
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Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change.