Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 9

CHAPTER 9

TAX REDUCERS

In this chapter you will learn about various tax reducers including:
– maintenance relief
– subscribing for shares under the Enterprise Investment Scheme and the Seed Enterprise
Investment Scheme
– Social Investment Tax Relief
– subscribing for shares in Venture Capital Trusts

9.1 Introduction

Let us start by reminding ourselves where tax reducers slot into the income tax
computation. We start with the taxable income then tax this income at the usual
rates. From the resulting figure of tax, we can deduct any available tax reducers.
This gives us the tax liability for the year. From the tax liability we deduct tax credits
to give us a figure of tax due or tax repayable for the tax year.

Non Savings Interest Dividends

Taxable Income X X X

Tax @ relevant rates X

Less: Tax reducers (X)
Tax liability X
Less: Tax @ source (X)
Tax due/(repayable) X

We have already seen two tax reducers.

The marriage allowance (MA) allows certain married couples/civil partners to

transfer 10% of the personal allowance between spouses/civil partners. Relief is
given to the recipient spouse as a tax reducer at 20%.

The married couples allowance (MCA) of £8,695 is available where one

spouse/civil partner was born before 6 April 1935. Relief is given as a tax reducer at
10%. The MCA is reduced where adjusted net income exceeds £28,900. The
minimum MCA is £3,360, which at 10% gives a minimum tax reducer of £336.

We will now look at the other tax reducers.

9.2 Maintenance Relief

Maintenance payments are payments made by a taxpayer to a former or

separated spouse/civil partner for the maintenance of that former spouse/civil
partner or for the maintenance of a child of the family. To obtain any tax relief for
maintenance payments, such payments must be made by virtue of a Court Order,
or by virtue of an Assessment by the Child Support Agency(CSA). ITA 2007, s.453

Maintenance payments are always paid gross - i.e. tax is not withheld at source by
the payer. The payer of a maintenance payment will only obtain tax relief if either
the payer or the recipient was born before 6 April 1935. Therefore, relief is available
to elderly taxpayers only.

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The payer of the maintenance payment will obtain tax relief on the lower of the
amount of the maintenance payments due to be paid, and £3,360 (i.e. the same
figure as the minimum amount of the married couples allowance). Relief will be
given to the taxpayer by way of a tax reducer at 10%. This will be 10% of the lower
of the amount paid or £3,360. This means that the maximum amount of the tax-
reducer in respect of maintenance relief for 2018/19 is £336.

 Illustration 1

Harry (85) is married to Evelyn (64). Harry’s income for 2018/19 is £16,000 and
Evelyn’s is £14,000. He is divorced from his first wife, Sally (74) and pays her
maintenance of £200 per month.

Calculate Harry’s tax reducers, assuming the most beneficial claims are made.

Harry's tax reducers for 2018/19 will be calculated as follows:

£
Married couples allowance (8,695 @ 10%) 870
Maintenance relief = lower of
(a) 200 × 12 = 2,400
(b) 3,360
i.e. 2,400 @ 10% 240
Total 1,110

Maintenance payments are always tax-free income in the hands of the recipient,
irrespective of the amount paid and regardless of whether tax relief is received or
not.

9.3 Enterprise Investment Scheme

Under the Enterprise Investment Scheme (EIS), a taxpayer obtains tax relief when
he subscribes for shares in an EIS company – i.e. a company that satisfies the
conditions of the Enterprise Investment Scheme. ITA 2007, s.157

In essence the taxpayer gives a capital sum to the company and the company
gives the taxpayer shares in return. It is important to note that the investor must
subscribe for the shares. This means that the company is issuing brand new shares
to the taxpayer.

In order to encourage members of the public to invest in these EIS type

companies, HMRC gives tax relief on the subscription. The relief is given by way of
a tax reducer.

The tax reducer is in respect of the lower of the amount subscribed for the shares
and £1 million (where there is no investment in a knowledge intensive company).
Tax relief is then given at the flat rate of 30%. Therefore, the maximum tax reducer
an individual is entitled to in respect of EIS relief in 2018/19 (where there is no
investment in a knowledge intensive company) is £300,000, being £1 million at 30%.

Where an individual subscribes for shares in an EIS company which is a knowledge

intensive company, the maximum amount eligible for income tax relief increases
to £2 million, of which not more than £1 million can be used to subscribe for shares
in companies which are not knowledge intensive.

If shares are subscribed for in a knowledge intensive company, the maximum tax
reducer in 2018/19 will be £600,000 ie £2 million at 30%. ITA 2007, s.158

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EIS income tax relief will reduce a tax liability, but it cannot turn the tax liability into
a negative figure. Therefore, if the EIS income tax relief due is greater than the
amount that the taxpayer owes for the year, his tax liability is zero. Any tax
deducted at source, for instance tax deducted under PAYE, would therefore be
repaid.

9.4 Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) allows an investor to claim tax relief
in respect of subscriptions for shares in SEIS companies. SEIS relief is available for
investments in small, early-stage (or “seed”) companies.

With SEIS relief is calculated in respect of the lower of the amount subscribed and
£100,000. Relief is given at a rate of 50% so the maximum tax reducer in respect of
an SEIS income tax relief in 2018/19 is £50,000. Again, the relief cannot exceed the
individual's tax liability for the year. ITA 2007, s.257AB

9.5 Social Investment Tax Relief

Under Social Investment Tax Relief (SITR) an individual is able to claim income tax
relief when they subscribe for shares or acquire debentures, in a social enterprise.

A social enterprise is a community interest company, a community benefit society

or a charity. ITA 2007, s.257J

Income tax relief is available at a rate of 30% of the lower of the amount invested
and £1 million. Therefore, the maximum relief available is £300,000 per tax year.
ITA 2007, s.257JA

As with EIS and SEIS relief, the relief cannot exceed the individual’s income tax
liability for the year.

9.6 Venture Capital Trusts

Tax relief on subscriptions for shares in a Venture Capital Trust (VCT) is given in
much the same way as tax relief on EIS and SEIS shares and investments in social
enterprises. If a taxpayer subscribes for new shares in a company that satisfies the
conditions of a Venture Capital Trust, tax relief is given by way of a tax reducer.
ITA 2007, s.261

The tax reducer is 30% of the lower of the amount subscribed for shares in the VCT,
or £200,000. The maximum tax relief obtained on a VCT subscription in 2018/19 is
therefore £60,000, i.e. £200,000 at 30%. Again this tax reducer can reduce a tax
liability to zero, but cannot itself create a repayment. ITA 2007, s.263

9.7 Additional Points on Married Couples Allowance

Where there is more than one tax reducer the order in which tax reducers are
deducted is VCT, EIS, SEIS, relief for social investments, Maintenance payments
and finally MCA or the MA. ITA 2007, s.27

Remember that an individual will not be eligible for both the MCA and the MA as
the MA is only available if neither spouse /civil partner has claimed the MCA.

The fact that relief for the MCA (where claimed) is offset last is helpful because any
unused MCA can be transferred to the other spouse at the end of the year. This
may happen, for example, if the husband / high earner has insufficient income to

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use up the full amount of the married couples tax reducer. So as the MCA is set off
last, we can make sure that any excess does not go to waste. ITA 2007, s.51

If the husband / high earner wishes to transfer excess MCA, he must make a claim
to this effect within 4 years of the end of the tax year. The transfer will not happen
automatically.

The MCA tax reducer is allocated to the husband / high earner in the first instance.
However, the wife / lower earner may make an election to claim 50% of the
minimum MCA. For 2018/19, they may therefore claim a tax reducer of £168, being
10% of one half of the minimum allowance of £3,360, leaving the other spouse /
partner with the rest of the tax reducer. This claim does not need the partner's
consent, but must take place before the start of the tax year if it is to be valid.
Note that this will not increase the amount of the relief but will simply alter the way
it is allocated. ITA 2007, s.47

Alternatively, if the couple both elect, the wife / lower earner may take the whole
of the minimum MCA – i.e. £3,360 at 10% – again leaving their partner with the rest.
If the partner cannot use the remainder, the balance may be transferred after the
end of the tax year. ITA 2007, s.48

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Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 9

EXAMPLES

 Example 1

Mike (85) has been married to Anne (80) for over 40 years. His net income (before
PA) for 2018/19 is £31,000.

Mike makes the following payments:

£
Maintenance to ex-wife (per month) 100
Subscription for EIS shares 4,000

Calculate his total tax reducers.

 Example 2

Mike (85) has been married to Anne (80) for over 40 years. His net income (before
PA) for 2018/19 is £31,000.

Mike makes the following payment:

£
Subscription for EIS shares 4,000

Calculate his total tax reducers.

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ANSWERS

 Answer 1

£
MCA (born before 6 April 1935) 8,695
Less ½ × (31,000 – 28,900) (1,050)
7,645

MCA tax reducer

(7.645 @ 10%) 765

Maintenance relief lower of:

a) 100 × 12 = 1,200
b) 3,360
i.e. 1,200 @ 10% 120

EIS relief
4,000 @ 30% 1,200

Total tax reducers 2,085

 Answer 2

£
MCA (born before 6 April 1935) 8,695
Less ½ × (31,000 – 28,900) (1,050)
7,645

MCA tax reducer

(7,645 @ 10%) 765

EIS relief
4,000 @ 30% 1,200

Total tax reducers 1,965

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Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 9

TAX REDUCERS

Certain reliefs are given as a deduction from income tax and are called tax reducers.

Relief for the MCA and the MA are given as a tax reducer (covered in an earlier chapter).

MAINTENANCE RELIEF

As well as the MCA and the MA which have already been covered, relief is also given for
maintenance payments (where either the payer or recipient was born before 6 April 1935).
The relief is 10% of the lower of:

• the amount paid; or

• £3,360.

Maintenance payments are not taxable income for the recipient.

ENTERPRISE INVESTMENT SCHEME

If a taxpayer subscribes for EIS shares, a tax reducer is given, being a percentage of the
lower of:

• the amount invested; or

• £1 million.

The £1 million maximum increases to £2 million where shares are subscribed for in
knowledge intensive companies. In this case, the maximum that can be subscribed for
shares in companies which are not knowledge intensive is £1 million.

For 2018/19 the percentage is 30%.

(s.158 ITA 2007)

SEED ENTERPRISE INVESTMENT SCHEME

If a taxpayer subscribes for SEIS shares, a tax reducer is given, being a percentage of the
lower of:

• the amount invested; or

• £100,000.

For 2018/19 the percentage is 50%.

(s.257AB ITA 2007)

SOCIAL INVESTMENT TAX RELIEF

If a taxpayer subscribes for shares or makes a qualifying debt investment in a social

enterprise, a tax reducer is given, being a percentage of the lower of:

• the amount invested; or

• £1 million.

For 2018/19 the percentage is 30%.

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(s.257JA ITA 2007)

VENTURE CAPITAL TRUSTS

If a taxpayer subscribes for VCT shares, a tax reducer is given, being a percentage of the
lower of:

• the amount invested; or

• £200,000.

(s.262 ITA 2007)

For 2018/19 the percentage is 30%.

(s.263 ITA 2007)

Where there is more than one tax reducer the order in which they are deducted is VCT,
EIS, SEIS, SITR, Maintenance payments and finally MCA or MA.
(s.27 ITA 2007)

MCA

Excess MCA tax reducers may be transferred to the wife / lower earning partner at the
end of the tax year to prevent them going to waste.
(s.51 ITA 2007)

Alternatively, claims can be made to allocate either half or all of the minimum MCA tax
reducer (£3,360 × 10%) to the wife / lower earner before the start of the tax year.
(s.47 and s.48 ITA 2007)

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