Relief against income tax of losses on EIS investments.
Most investors’ view of EIS relief is focused on the level of day one relief against income tax.
There are, of course, plenty of other tax benefits of EIS investing.
And a distant second is the possibility of some loss relief to mitigate the pain if the investment flops. It’s a distant second because any loss is some way in the future and because it’s a great investment so there won’t be a loss, or we hope there won’t be one. It’s just human nature.
In our latest note from DSW Angels we will take a closer look on the real benefit of loss relief, why it deserves more attention, and on one very specific advantage of loss relief in having a broad portfolio of EIS investments.
This isn’t tax advice, it’s food for thought. Take your own specialist tax advice if you are not sure of your position. Relief is not guaranteed and in any case the rules may change. You will, of course, need to have some income tax against which to claim loss relief at some unspecified point in the future.
How does loss relief work?
It’s worth noting firstly that loss relief isn’t a specific EIS relief. Losses on some non-EIS-qualifying investments also can be relieved against gains. It’s just that an EIS qualifying investment should also qualify for relief of any losses on exit against income tax.
We don’t plan to set out details of getting the relief which HMRC have kindly summarised here.
At the point of disposal or making a negligible value claim, the net loss which arises can be offset in calculating your current income tax. The net loss is calculated as disposal proceeds minus original cost but adding back (and this shouldn’t come as a surprise) the EIS relief already given at the time of investment. In that way, a £10,000 EIS-qualifying investment that is written-off would, for an additional rate taxpayer, produce the following tax reliefs:
Illustration 1: EIS relief on a total loss
- Day one EIS relief: £10,000 @ 30% = £3,000
- Relief of net loss against income tax: (£0 – £10,000 + £3,000) @ 45% = £3,150
- Total relief = £6,150
- Net loss = (£10,000 – £6,150) = £3,850
For an SEIS investment, the relief is even higher. In the above situation, relief for an SEIS investment would amount to £7,250 – in other words, only 27.5 pence in the pound is exposed to commercial risk.
The really important point to note is that loss relief can be more or nearly as important as the day one EIS relief.