Venture

Tax benefits of EIS: case studies

Case study: tax treatment of profits with EIS - increasing net gains and deferring Capital Gains Tax (CGT)

This example shows how a profitable EIS investment can help investors to defer tax and increase after-tax gains.

Key tax benefits from a profitable EIS investment exit:

  • £50,000 investment
  • £21,000 net cost untill disposal of EIS
  • £14,000 of CGT deferred for five years
  • Zero CGT due on gains realised from the investment

Here’s how this investment example works:

  1. Investor made taxable gains of over £50,000 in 2018.
  2. £50,000 EIS investment 1 October 2019 treated as being made in 2018/19 tax year.
  3. Carry back relief yields a £15,000 income tax repayment.
  4. Capital Gains TaxCGT deferral yields a £14,000 CGT repayment.
  5. Net cost of the investment is £21,000 (i.e. £50,000 minus the CGT and income tax repayments).
  6. In May 2025, investment is sold for £250,000.

    No tax is due on the realized gain because the investment stays within the EIS qualifying conditions.
  7. The deferred CGT (£14,000) becomes due.
  8. For a net cost of £35,000, the investor has realised £250,000, plus the benefit of deferring CGT of £14,000 for approximately five years.

Case study: tax treatment of losses with EIS – minimising net loss

  1. Manager completes £50,000 investment on behalf of investor on 1 October 2019 into an EIS qualifying company.
  2. The investor had realised a taxable gain of over £50,000 in 2016, on which he had paid CGT at a rate of 20%.
  3. The investor opts to treat his investment as having been made in the 2018/19 tax year and receives an Income Tax repayment through Carry back relief of £15,000 (£50,000 @ 30%).
  4. He also claims CGT deferral and receives a CGT repayment of £10,000 (£50,000 @ 20%).
  5. The net cost of investment is therefore £25,000.
  6. In December 2020 the investment completely fails and there is no shareholder return.
  7. The deferred gain of £50,000 comes back into the charge to tax and a £10,000 CGT liability will arise.
  8. However, the loss net of Income Tax (£35,000) can be offset against the Investor's marginal tax rate of 45%, meaning that the net loss is reduced to £19,250 (38.5% of the original investment).

Disclaimer:

The above examples are illustrative only. Tax and relief rates are subject to change and your personal circumstances. We are unable to give tax or investment advice and you should always consult your professional advisers.

Important Information: To obtain the tax reliefs described, it is necessary to subscribe for new shares in EIS qualifying companies and claim the relief against your tax liabilities. The tax reliefs will only be relevant to investors who pay UK income tax and/or wish to defer a capital gain. Shares must be held for at least three years to receive most EIS benefits summarised above. Investors should take their own tax advice if required. Mercia Fund Management Limited (MFML) is not authorised to provide specific and personal advice on the suitability of investments for a potential investor’s individual circumstances, risk tolerance or investment objectives. If you have any doubt about whether an investment in a fund such as an EIS Fund is appropriate you should consult a suitably qualified financial adviser.