Company X is a new trading company looking to generate £300,000 to develop, manufacture and retail its new autonomous lawnmower. As the company has no proven track record, it is finding it difficult to persuade investors to finance its idea.
Jane is a highly paid international IT consultant who has an Income Tax liability of £150k. She recently sold an investment property realising a capital gain of £200,000 with a potential Capital Gains Tax liability of £56,000.
Assuming Company X meets all the relevant criteria for EIS, should Jane invest the full £300,000 in Company X:
• Income Tax relief of £90,000 would be available reducing her Income Tax liability for the year to £60,000
• The Capital Gains Tax liability of £56,000 would be mitigated until a future date allowing her to utilise the funds to say, invest in other commercial ventures.
The company was very successful and after three years Jane’s original investment is now valued at over £1m. The founders offer to purchase Jane’s shares at their market value. As such, Jane has realised a gain on her investment of £700k which is tax free.
Alternatively, Jane may opt to retain the shares and continue to hold a right to dividends as opposed to realising capital value.