EIS income tax carry back relief

Five reasons why 20% income tax relief may be preferable to 30%­

Enterprise Investment Scheme (EIS) investors can take advantage of ‘carry back’ which allows the cost of shares to be treated as though they had been acquired in the previous tax year, enabling investors to benefit from income tax relief in the preceding year.  But with EIS income tax relief increased to 30% for the 2011/12 tax year why would anyone want to carry back to 2010/11 when only 20% income tax relief was available?

There are five reasons why investors may choose to carry back EIS investments to 2010/11 and sacrifice 10 per cent income tax relief:

  • Use it or lose it:  Many people assess their previous year’s tax after the end of the tax year and then invest in EIS using carry back to mitigate that tax bill.  Failing to carry back loses out on a valuable tax relief that cannot be regained in the future.  The 30% income tax relief will still be available through carry back the following tax year.
  • One off tax bill in previous year:  People with an unusually high income tax liability in 2010/11, which will not be repeated in 2011/12 can carry back to mitigate the previous year’s bill.
  • Access to tax relief cash earlier:  Under self assessment taxpayers must settle their outstanding tax bill by 31 January of the following year.  Investors carrying back current investments to 2010/11 tax year will benefit from a reduced tax bill in January 2012 rather than having to wait until January 2013.
  • Invest £1 million in EIS in 2011/12:  Investors who had not used their EIS tax relief in 2010/11 can double their investment in 2011/12 from £500,000 to £1 million by carrying back half the investment to 2010/11.
  • Capture CGT deferral:  EIS investors can defer taxation on capital gains incurred up to 36 months before the date the EIS shares were acquired.  Using carry back in 2011/12, investors with CGT liabilities can defer CGT gains right back to 2008/09 tax year.

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About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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