Capital Gains Tax vs Income Tax: An Overview
Personal income tax is charged on earnings from employment, dividends, employment, interest, royalties, or self-employment, across a range of types from services, cash or property. In contrast, capital gains tax is charged on gains that derives from the sale or exchange of a capital asset, such as a shares or property.
Capital Gains Tax Reliefs Via SEIS
In addition to the often stated income tax reliefs for investing in an SEIS, there are Capital Gains Tax (CGT) reliefs which for some taxpayers can be even more valuable. What is commonly referred to as the gold standard in CGT relief is entrepreneurs’ relief. Where entrepreneurs’ relief is available CGT of 10% rather than the normal rate of 28% is due. However, where the qualifying conditions for the SEIS are met there is a 100% exemption from CGT on the sale of shares more than three years after the date on which they were issued.
Interestingly, if the shares were sold before the three years condition is met they may still qualify for entrepreneurs’ relief. In order to claim CGT disposal relief, taxpayers must have received income tax relief on the cost of the shares. If no claim to income tax relief is made, then any other sale of the shares will not qualify for exemption from CGT.
There is also an additional exemption from CGT, known as CGT: reinvestment relief. This applies where assets are sold and all or part of the gain is invested in shares that qualify for SEIS. Reinvestment relief is available at 50% of the CGT on gains reinvested within the SEIS. The maximum gain to be relieved is capped at £100,000, resulting in a maximum CGT relief of £14,000, and the relief will be withdrawn if the SEIS relief is ultimately withdrawn.
This shows just how important it is to get professional advice when making an SEIS or EIS investment and how to maximise the available reliefs.
Bernard sells an asset and makes a profit (before exemption) of £50,000. He invests all this £50,000 profit in qualifying SEIS shares. Bernard will be able to claim a reduction of £25,000 (50% of the amount invested in SEIS) in the chargeable gain on the shares. This would save Bernard 14% tax i.e. 50% of the current capital gains tax rate of 28%.
Although it is not strictly an SEIS relief, an SEIS investment will normally qualify for 100% relief from inheritance tax where the usual conditions are met and after being held for just two years.