UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
4.2 Tax Treatment Tax Benefits of the EIS, SEIS and VCT Income tax The EIS, SEIS and VCT relief offer upfront income tax deductions of 30% of the investment for EIS and VCT relief, and 50% for SEIS. Note, how - ever, that the reliefs can be withdrawn in certain circumstances where the relevant holding period requirement is not met. EIS and SEIS reliefs may be carried back to reduce prior-year income tax bills. The schemes reduce income tax liabilities to nil, but will not create a deficit. Capital gains tax (CGT) The schemes may also allow CGT relief in cer - tain circumstances. If the relevant shares have been held for their requisite holding period and income tax relief was obtained at the time, gains on disposal should be exempt. An individual can also defer gains made on other investments into EIS investments made within a period beginning one year before and three years after the EIS investment. In such circumstances, a future EIS loss may shelter a recrystallised gain (which would be charged at the rates of CGT when brought back into charge). Inheritance tax EIS and SEIS shares qualify for “business prop- erty relief” in respect of inheritance tax if they are held for two or more years. From 6 April 2026, “business property relief” provides an exemp - tion from inheritance tax up to GBP1 million (per estate). Any assets over that threshold shall be charged at an effective inheritance tax rate of 20%. Other Tax Benefits Available in the UK The UK tax system is favourable to VC investors.
• Dividends – there is no withholding tax on dividends in the UK, and the receipt of divi - dends, whilst taxable, is subject to a number of exclusions that may apply (including, spe - cifically, one relevant to dividends from VCTs). • Interest is subject to 20% withholding tax, which can be offset against income taxes payable by UK resident individuals. The UK has an extensive double tax treaty network that seeks, where possible, to limit double taxation for non-UK residents. Individu - als investing in trading companies, broadly, controlled by either directors or five or fewer persons may also be able to claim deduc - tions for interest payments on debt obtained for the purchase of 5% or more of the shares. This relief cannot be used in conjunction with the EIS (which should be more beneficial, if available). • CGT – Business Asset Disposal Relief (for - merly entrepreneurs’ relief) allows a 14% reduced rate of CGT (from 6 April 2025 – a 4% increase from the 10% rate applicable in earlier years), up to the lifetime limit of GBP1 million of gains. This relief is relevant to employees and directors who, broadly, also hold a 5% (economic, voting and beneficial ownership) shareholding for a two-year period prior to disposal. Alternatively, Investors’ Relief may be available to similarly limit the CGT rate to 14% (from 6 April 2025 – previ - ously 10% as above) on lifetime gains of up to GBP1 million (for qualifying disposals made before 30 October 2024 – previously GBP10 million), but for external investors only, and requires a three-year holding period. The Business Asset Disposal Relief and Investors’ Relief rates are expected to rise to 18% from 6 April 2026. • Share loss relief – where an investor has invested in qualifying trading companies, share losses may be claimed as relief against
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