His income tax for 2018/9 will be £75,600.
Mr Middleton cashed in a range of investments in late 2017 making a profit of over £100,000.
So now he owes £28,000 in Capital Gains Tax too.
Now Paul can offset 30% of his total £100,000 investment against his income tax, saving £30,000.
And thanks to Capital Gains Tax Deferral, Paul can offset the CGT charge from 2017 in its entirety, saving a further £28,000.
His tax bill drops to £45,600, a whopping saving of £58,000
Three years later, in 2021, Paul decides to exit his investments. Three of the businesses have been wound up, so he will lose the £60,000 he invested. Of the remaining two, one is planning a management buy-out at a similar price to the original investment, and the other business is being bought by a competitor at a 50% premium.
Because Paul has held his shares for three years, he can offset his losses against income tax in 2021/22.
He invested £60,000 in the failed businesses, but has already offset 30% of this against his income tax in 2018. So the net loss is £42,000.
As a maximum rate tax payer, Paul can now claim 45% of this loss, which is a further saving of £18,900.
If Paul chooses not to invest in EIS-eligible opportunities, then he will be subject to full income tax (at 45%) and Capital Gains Tax on his £100,000 exit in 2017.
| Year | Income | Tax | Investment | Net |
|---|---|---|---|---|
| 2017 | £200,000 | (£75,600) | £100,000 | £224,400 |
| 2018 | £200,000 | (£103,600) | - | £96,400 |
| 2019 | £200,000 | (£75,600) | - | £124,400 |
| 2020 | £200,000 | (£75,600) | - | £124,400 |
| 2021 | £200,000 | (£75,600) | - | £124,400 |
| £1,000,000 | (£406,000) | £100,000 | £694,000 |
If Paul invests £100,000 in EIS-eligible companies in 2018, then the overall net benefit (based on the example above) would be c.£30,000 by 2021. And because EIS investments can be rolled over, Paul could re-invest his gains and continue to benefit from income tax and CGT relief.
| Year | Income | Tax | Investment | Net |
|---|---|---|---|---|
| 2017 | £200,000 | (£75,600) | £100,000 | £224,400 |
| 2018 | £200,000 | (£42,000) | (£100,000) | (£58,000) |
| 2019 | £200,000 | (£75,600) | - | £124,400 |
| 2020 | £200,000 | (£75,600) | - | £124,400 |
| 2021 | £200,000 | (£56,700) | £50,000 | £193,300 |
| £1,000,000 | (£325,500) | £50,000 | £724,500 |
It means that the generous tax advantages available for EIS investments can offset a significant portion of the cost of an investment and help achieve a better net position in time. It also underlines the importance of building a diversified and varied portfolio.