The Enterprise Investment Scheme (EIS) offers a number of valuable tax reliefs to individuals who subscribe for shares in qualifying companies, including income tax relief equal to 30% of the amount invested and an exemption from capital gains tax (CGT) on disposal of the shares provided, broadly, they have been held for three years.
A recent decision of the First Tier Tribunal showed that the CGT relief could be lost as a result of a simple and very understandable omission by the taxpayer.
In Ames v HMRC (TC04523)
the taxpayer subscribed £50,000 in 2005/06 for shares in a company set up to operate an indoor skydiving simulator. His income for the year was only £42. This was covered by his personal allowance with the result that he had no income tax liability. Accordingly, he did not make a claim for EIS income tax relief because this appeared unnecessary.
In 2011/12 the taxpayer sold the shares, realising a gain of £272,540. HMRC maintained that this amount was chargeable to tax because the CGT relief was only available, on the wording of the legislation, in a case where an individual’s income tax liability had been reduced by a claim to EIS relief.
The legislation exempts gains where:
- an amount of EIS income tax relief is ‘attributable’ to the shares;
- relief is so attributable where a reduction was made in the individual’s income tax liability as a result of the subscription for those shares; and
- such a reduction can only be made where the individual makes a claim.
The taxpayer had not made a claim for income tax relief (because the level of his income made it unnecessary), and it followed that the disposal of the shares was not eligible for CGT relief.
The income tax personal allowance is not automatic. In theory it relies on a claim being made by the taxpayer, though in practice HMRC’s systems are set up to give it automatically. HMRC accepted in the course of argument that the taxpayer could have ‘disclaimed’ his personal allowance, leaving his income of £42 in charge to tax, and could then have made an EIS claim. They were, however, not prepared to exercise their discretion to accept a late claim (and the Tribunal had no jurisdiction over this matter).
The taxpayer’s circumstances might appear exceptional, but it is not unusual for self-employed taxpayers to make low profits, or indeed losses, in isolated years. In addition, EIS investments may be entered into by ‘serial entrepreneurs’ who have negligible income but rely on capital gains.
If you have any doubt whether you have complied with the necessary formalities to obtain EIS CGT relief, please contact us for advice.