How to calculate the clawback of EIS income tax relief

By Tolley
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The following Owner-Managed Businesses 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 theUK.

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

  • income tax relief for theinvestor of up to 30% of theamount invested (see theEnterprise investment scheme income tax relief guidance note)
  • disposals of EIS shares after three years may be free from CGT (see theVenture capital scheme shares guidance note)
  • capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares (see theEnterprise investment scheme re-investment relief guidance note)
  • losses on EIS shares may be offset against taxable income (see theLosses on shares set against income guidance note)
  • EIS investments should qualify for IHT business property relief after two years’ ownership (see theBPR overview guidance note)

This guidance note discusses thecalculation of theamount of income tax relief that might be withdrawn or reduced in certain situations.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Broadly, income tax relief is withdrawn if, within three years of subscription (or three years from thecommencement of thetrade, if later):

  • the shares are gifted or sold to someone other than thespouse / civil partner (ITA 2007, ss 209210)
  • the investor is granted an option binding thegrantor to buy theshares or theinvestor grants an option which on exercise obliges him to sell theshares (ITA 2007, ss 211212; VCM15020)
  • the investor or his ‘associate’ receives ‘value’ from thecompany, or a person connected with thecompany (ITA 2007, ss 213

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