How to calculate the clawback of EIS income tax relief

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • How to calculate the clawback of EIS income tax relief
  • Introduction
  • Gift or disposal of EIS shares
  • Receipt of value
  • Repayment or repurchase of share capital
  • Administration
  • Interest on overdue tax

The enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies with a permanent establishment in the UK.

A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. He can benefit from the following tax reliefs:

  • income tax relief for the investor of up to 30% of the amount invested (see the Enterprise investment scheme income tax relief guidance note)
  • disposals of EIS shares after three years may be free from CGT (see the EIS and VCT shares guidance note)
  • capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares (see the Enterprise investment scheme re-investment relief guidance note)
  • losses on EIS shares may be offset against taxable income (see the Losses on shares set against income guidance note)
  • EIS investments should qualify for IHT business property relief after two years’ ownership (see the BPR guidance note (subscription sensitive))

This guidance note discusses the calculation of the amount of income tax relief that might be withdrawn or reduced in certain situations.

Introduction

Broadly, income tax relief is withdrawn if, within three years of subscription (or three years from the commencement of the trade, if later):

  • the shares are gifted or sold to someone other than the spouse / civil partner (ITA 2007, ss 209–210)
  • the investor is granted an option binding the grantor to buy the shares or the investor grants an option which on exercise obliges him to sell the shares (ITA 2007, ss 211–212; VCM15020)
  • the investor or his ‘associate’ receives ‘value’ from

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