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Case studies

Description of model portfolio and tax treatment of profit and loss

Tax treatment of profit

On behalf of an investor in the EIS Fund, the Manager invests £50,000 on 1 October 2017 in shares in an EIS qualifying company that has already commenced trading. The investor had realised a taxable gain of over £50,000 in 2015, on which he had paid Capital Gains Tax (CGT) at a rate of 28%. The investor opts to treat his investment as having been made in the 2016/17 tax year, and receives an Income Tax repayment through Carry back relief of £15,000 (£50,000 @ 30%). They also claim Capital Gains deferral and receive a CGT repayment of £14,000 (£50,000 @ 28%). The net cost of their investment becomes £21,000. In May 2021 the investment is sold for £250,000. There has been no breach of EIS qualifying conditions so Capital Gains exemption applies and no tax is due on the realised gain. However, the deferred gain of £50,000 comes back into the charge to tax. The CGT rate has changed to 20%, and the investor does not claim further Capital Gains deferral, CGT of £10,000 is payable on 31 January 2023. For a net cost of £31,000, the investor has realised £250,000, plus the benefit of deferring CGT of £10,000 for approximately five years and in this case, lowering the CGT bill by £4,000.

Tax treatment of loss

On behalf of an investor in the EIS Fund, the Manager invests £50,000 on 1 October 2017 in shares in an EIS qualifying company that has already commenced trading. The investor had realised a taxable gain of over £50,000 in 2016, on which he had paid CGT at a rate of 20%. The investor opts to treat his investment as having been made in the 2016/17 tax year, and receives an Income Tax repayment through Carry back relief of £15,000 (£50,000 @ 30%). They also claim Capital Gains deferral and receive a CGT repayment of £10,000 (£50,000 @ 20%). The net cost of their investment becomes £25,000. In December 2020 the investment completely fails and there is no shareholder return. The deferred gain of £50,000 comes back into the charge to tax and a £10,000 CGT liability will arise. 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.

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