Tax incentives: Other considerations

Capital losses on shares

EIS

If EIS shares are sold at arm’s length at a loss, or the company goes into liquidation, a capital loss will accrue. This is calculated in the normal way less any income tax relief given and not withdrawn. This capital loss can also be set against income in the year it arises and/or the previous tax year. For a 45% taxpayer, this currently limits the maximum economic loss to 38.5% for an EIS investment.


SEIS

Similar rules apply to losses realised on SEIS shares as apply under the EIS scheme, although the rate of income tax relief to restrict the amount of the loss is 50% rather than 30%. For a 45% taxpayer, this currently limits the maximum economic loss to 27.5%, ignoring the effect of any CGT exemption obtained for gains
reinvested in SEIS qualifying shares (see page 12).

VCT
No allowable CGT loss accrues on VCT shares if they are sold at a loss or become worthless.

 

Tax relief practicalities

EIS
None of the EIS reliefs can be obtained until the company supplies an EIS 3 certificate to the investor. The company can only submit an EIS 1 form, which gives rise to the EIS 3 certificate if HMRC allow the claim, when it has been trading for at least four months. There may therefore be a significant delay in obtaining relief when a company is not already trading and needs time to prepare for the trade.

In all cases, however, the relevant tax year for claiming relief will be based on the date the relevant shares were issued, not when the certificates are issued. There are further requirements as to how quickly the cash raised must be invested into a qualifying trade.

If an EIS 3 is not available when the tax return is submitted, the taxpayer must pay the tax and subsequently amend the return and get a repayment of the tax overpaid.

The company must submit an EIS 1 form within two years of the end of the year of assessment in which the shares are subscribed for or, if the company completed the first four months of trading in a later year of assessment, within two years of the end of that four month period.

The investor must claim relief within five years from the 31 January following the tax year in which the subscription was made. This time limit for a claim for EIS relief is specifically prescribed in the legislation, and therefore is not affected by the general time limit for making claims having been reduced from five years and ten months to four years.

SEIS
The investor must claim relief within five years from the 31 January following the tax year in which the subscription was made. An SEIS 1 form cannot be submitted until the new qualifying trade has been carried on for at least four months or if earlier, at least 70% of the SEIS monies has been spent.

VCT
The investor must claim relief within four years from the end of the tax year in which the investment was made.

 

Inheritance tax considerations

The IHT aspects of these schemes should also be borne in mind.

EIS shares

EIS shares cannot normally be quoted and must be in trading companies. Shares in AIM companies do not count as quoted for this purpose. They should therefore
normally attract IHT business property relief (BPR). Holdings of any size attract relief. A holding of less than 30% in an EIS company is therefore potentially
very useful since it could attract one or more of the following:

  • Income tax relief at 30%;
  • CGT exemption on disposal at a gain but
    relief on a loss;
  • CGT deferral (with deferred gains falling out
    of charge on death): and/or
  • 100% IHT relief on a gift or on death.

The IHT relief for EIS shares should be contrasted with the position of any private assets which may be sold to realise the funds to invest; these are normally fully liable to IHT, so by reinvestment a considerable IHT advantage can be obtained. Normally however, the new shares must be owned for two years prior to the IHT
event for BPR to be due, so life insurance cover may be advisable in the meantime.

SEIS shares
The same IHT considerations apply to SEIS shares as apply to EIS shares.

VCT shares
VCT shares will not attract any special reliefs for IHT purposes since they must be quoted.

An overview of the tax incentives.

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Adrian Walton Smith & Williamson
Adrian Walton

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