The essentials: Income Tax, Capital Gains Tax, and Inheritance Tax

Understanding the distinctions between these taxes is crucial before delving into the specific EIS-related tax reliefs available to investors.

Income tax

Income tax applies to the earnings an individual receives, such as wages, dividends, pensions, rental income, savings interest, and certain state benefits. The rates vary depending on the total income earned during the tax year.

Band	Taxable Income	Tax Rate (Non-Dividends)	Dividend Tax Rates
Personal allowance	Up to £12,570	0%	0%
Basic rate	£12,571 to £50,270	20%	8.75%
Higher rate	£50,271 to £125,140	40%	33.75%
Additional rate	Over £125,140	45%	39.35%

Capital Gains Tax (CGT)

Capital gains tax is payable when an asset is sold for more than its original purchase price. CGT is charged when gains exceed the annual exempt amount (AEA) of £3,000. The applicable rate depends on combined income and capital gains.

Basic Rate Taxpayers: 18% for residential property (excluding the main home), 10% for other assets.
Higher/Additional Rate Taxpayers: 24% for residential property (excluding the main home), 20% for other assets.

Inheritance Tax

Inheritance tax is levied on the estate of a deceased person, including some gifts made within seven years before death. The first £325,000 of an estate is exempt, with a 40% tax applied to anything above that threshold.

Investors should seek advice from a professional tax adviser to fully understand how these taxes apply to their personal situations.

Resources List