OC TOP U S
INVESTMENTS
A G U I D E TO LO S S R E L I E F
FOR UK INVESTORS AND ADVISERS ONLY
2
Octopus Investments – A guide to loss relief
Introduction
The Enterprise Investment Scheme (EIS) is a government initiative designed to
encourage individuals to invest in early stage companies. They provide finance for
smaller, higher-risk companies to help them develop and grow. The government
recognises the benefits smaller businesses bring to the UK economy and offers
a range of tax benefits to reward you for investing in small companies through
an EIS. But to take full advantage of these benefits you have to hold on to your
investment for at least three years.
Due to the nature of the underlying investments
in an EIS portfolio, we expect there to be
variation in the returns of the individual
companies. Some companies may do well, while
others may drop in value.
However, because EIS investors can take
advantage of loss relief, the impact of losses
at an individual company level can be reduced.
This has the potential to mitigate any
overall loss.
Loss relief is defined as the tax that an investor
can claim back, should their investment fall
below the ‘effective’ cost of that investment.
The ‘effective’ cost of an investment is equal to
the amount invested less any claimed income
tax relief.
Investors can choose when the relief is
set against other gains i.e. at time of claim
or in the future.
CLAIM AGAINST GAINS OR
TAX RELIEF
With most investments, you have to pay capital
gains tax (CGT) if the value goes up. This is not
the case with EIS. Furthermore, while there is
no CGT to pay if the value goes up, in addition
you can claim loss relief if the shares reduce
in value. With investments such as Individual
Savings Accounts (ISAs) and Venture Capital
Trusts (VCTs) gains don’t attract CGT, but you
can’t claim tax relief.
With an EIS you can offset your losses against
CGT from the current or future tax years.
Or, you can offset your loss against your income
(from current or previous tax year).
You choose whether offsetting against CGT or
Income Tax best suits your needs.
The relief is then calculated by applying an
investor’s marginal rate of either income tax or
CGT (i.e. up to 45%) to the ‘effective’ loss.
HOW DOES THIS WORK WITH A
PORTFOLIO OF EIS COMPANIES?
An EIS fund manager will often build you a
portfolio of ten or more companies. This means
that if any of the individual holdings within the
portfolio fall in value at the time of sale it will
qualify for tax relief, irrespective of the overall
portfolio performance.
Octopus Investments – A guide to loss relief
IF I INHERIT EIS SHARES CAN I CLAIM
LOSS RELIEF IF THEY HAVE FALLEN IN
VALUE?
No. Under HM Revenue & Customs rules if
you inherit shares (called secondary shares) as
the new beneficial owner you cannot claim loss
relief if the shares have lost value. The shares
are treated by HMRC as having been acquired
by the deceased’s personal representatives at
their market value at the time of death, even if
the shares have lost most or all of their value.
We suggest that you talk to your accountant or
financial adviser for more information.
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WHAT SHOULD I DO IF THE VALUE
OF MY SHARES FALLS TO ZERO?
If your shares in an EIS-qualifying company fall to
0p, you have the option of making a negligible
value claim informing HM Revenue & Customs
that the shares are worth nothing or next to
nothing. Usually a claim for loss relief is based
on the price you sell your shares for. But if the
shares have nil value you simply claim for the full
amount of your investment, less any income tax
you may have received on it. We suggest that
you talk to your accountant or financial adviser
for more information.
KEY RISKS
Like any investment, an EIS involves risks, and it is important that you understand them before
you decide to invest.
YOUR CAPITAL IS AT RISK
The rules on which companies qualify for EIS relief mean that investments have to be in small,
early-stage and high-risk companies. Your capital and investment return are not guaranteed
and you may not receive back all the money you invest.
YOUR INVESTMENT HORIZON
You should consider an EIS as a long-term investment. Investments in unquoted and AIMtraded companies are likely to be more volatile and to present a higher risk to your capital
than holdings in companies on the main London Stock Exchange. Investing for less than 5 to 7
years may result in you being more likely to suffer losses as a result of this volatility.
• Tax treatment depends on the individual circumstances of each investor and may be subject
to change. The availability of tax reliefs also depends on the investee companies maintaining
their qualifying status.
• This promotion does not offer investment or tax advice and as this product is not suitable
for everyone we recommend you seek independent investment and tax advice before
investing in our products.
Call us on 0800 316 2295
4
Octopus Investments – A guide to loss relief
Example
An EIS fund manager will typically look to invest clients’ money in a portfolio of at
least ten EIS-qualifying companies. These could be in either unquoted businesses,
companies listed on the Alternative Investment Market (part of the London Stock
Exchange) or a combination of both.
The example below shows how loss relief is calculated at the individual stock level after the initial
investment has been deployed across a discretionary portfolio. Charges to the investor would,
dependent on product choice, be applicable at various stages of the investment journey and could
include initial, annual management, dealing and performance related fees.
Initial
Investment
(assumes
100% qualifies
for Income
Tax Relief
at 30%)
Performance
at Exit
Proceeds
at Exit
Effective Loss
(amount
invested less
income tax
relief)
Loss Relief
@ 45%
Company 1
£10,000
-100%
£0
£7,000
£3,150
Company 2
£10,000
-100%
£0
£7,000
£3,150
Company 3
£10,000
-100%
£0
£7,000
£3,150
Company 4
£10,000
-100%
£0
£7,000
£3,150
Company 5
£10,000
-100%
£0
£7,000
£3,150
Company 6
£10,000
+50%
£15,000
n/a
n/a
Company 7
£10,000
+100%
£20,000
n/a
n/a
Company 8
£10,000
+200%
£30,000
n/a
n/a
Company 9
£10,000
+50%
£15,000
n/a
n/a
Company 10
£10,000
+100%
£20,000
n/a
n/a
Total
£100,000
–
£100,000
£35,000
£15,750
Octopus Investments – A guide to loss relief
Investment
Tax Reliefs
5
Net position from
investment return
and tax reliefs
£145,750
£100,000
+
Proceeds at exit
£30,000
Income Tax Relief
Received
+
£15,750
Loss Relief
at 45%
=
Combined position
from investment
performance and
tax reliefs
This Client Tax Scenario is designed to assist you in developing your own strategy where appropriate.
Among other things, you will need to consider the eligibility and timings of tax reclaims and tax
liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including
administration fee and an annual management charge), as relevant to the products(s) in which you
may choose to invest. Our example is for illustration purposes only, with losses or gains on the
investments and the portrayed tax situation assumed as is stated.
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6
Octopus Investments – A guide to loss relief
NOTES:
Octopus Investments – A guide to loss relief
7
Call us on 0800 316 2295
IMPORTANT INFORMATION.
This financial promotion is issued by Octopus Investments Ltd,
which is authorised and regulated by the Financial Conduct
Authority, and does not offer investment or tax advice.
Your capital is at risk and you may not get back the full
amount invested. Tax treatment depends on the individual
circumstances of each investor and may be subject to
change. Past Performance is not a reliable indicator of future
results and any forecast is not a reliable indicator of future
performance. The availability of tax reliefs also depends on the
investee companies maintaining their qualifying status. An EIS
can invest in unquoted companies and AIM listed companies
which are likely to have higher volatility and liquidity risk than
shares quoted on the London Stock Exchange Official List.
This promotion does not offer investment or tax advice and
this product is not suitable for everyone. We recommend you
seek independent investment advice before investing in our
products. Octopus Investments registered office: 33 Holborn
London EC1N 2HT Registered in England and Wales under
No. 3942880.
CALL US
0800 316 2295
FPR00039-EIS-01-1114
EMAIL US
[email protected]
VISIT US
Octopus Investments, 33 Holborn, London EC1N 2HT
WEBSITE
octopusinvestments.com