Ask an expert: Disposal of EIS shares

First published in Tax Journal – 15.07.2017

EIS relief has been claimed in respect of the shares in a company which has been unsuccessful in developing a product. The company is facing liquidation and a shareholder has offered to buy the shares at 1p in the £. One tranche of shares was issued more than three years ago and another tranche was issued less than three years ago. What are the tax implications for the shareholders if they accept the offer for the shares or if the company goes into liquidation?

The enterprise investment scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who subscribe for new shares in those companies, provided specific conditions are met by the issuing company and the investor (these are not considered further here). Subject to satisfying these conditions, the following reliefs are available to the investor:

  • income tax relief at 30% of the amount invested in the shares up to a maximum investment of £1,000,000 with effect from 6 April 2012;
  • capital gains on the EIS shares are exempt if certain conditions are met but any capital loss is an allowable loss for capital gains tax;
  • the investment can be used to defer capital gains tax on the sale of any asset.
The income tax relief is given by way of a deduction from the total tax liability for the tax year in which the investment is made. There is also a ‘carry back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though those shares had been acquired in the preceding tax year. The shares must generally be held for three years from the date the shares were issued or income tax relief will be withdrawn.

As there are two tranches of shares issued, before and after a set period of time, care should be taken to understand the income tax, and capital gains position on disposal. A full response to the question can be downloaded here.

For further information, please get in touch with Jackie Wheaton or your usual Moore Stephens advisor.

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