Here’s an example of the tax savings that could be made:
Take David, he sells a second home realising a gain of £100,000 and so has a capital gains tax liability at 28% i.e. £28,000. (presuming he has already used his annual exemption).
If he invested his total gain into a qualifying SEIS investment he would attract the following tax breaks:
Income tax relief at 50% on the amount invested – so £50,000 off his income tax bill;
Capital gains tax exemption at 50% on the amount invested – so a £14,000 capital gains tax reduction. (Note this is different to EIS where the gain is only deferred).
In total, a £64,000 tax reduction provided he keeps the shares for three years!
But what if the investment completely fails?
- His capital loss of £100,000 would be restricted by the income tax relief given but there is no restriction for the capital gains tax relief given;
- He is then able to convert the net capital loss of £50,000 to an income loss, thus offering a further income tax saving of £20,000 (assuming he is a 40% tax payer).
This comes to a £84,000 tax saving meaning the potential loss is only £16,000 on the £100,000 invested!
Yes, EIS and SEIS investments are considered a more risky investment, but they are not always and the tax savings that can be achieved maybe worth the risk. And that’s before we’ve looked at the Inheritance Tax benefits…
If you want to know more, please get in touch, we’ll be happy to help guide you through your options