The Enterprise Investment Scheme
Adrian Mansbridge reviews the tax benefits of the Enterprise Investment Scheme and key regulations to be aware of.
The tax benefits arising from Enterprise Investment Scheme (EIS) investments are well known.
As an incentive for relatively high risk investments, 30% of the cost of shares can be offset against income tax, there are no capital gains tax (CGT) liabilities if held over 3 years and dividends are not taxable.
However, if an EIS investment fails there are also incentives to soften the blow. The directors normally notify the shareholders when an EIS company has failed. They may even refer to it as being of “Negligible value”. If they do, it is important that the taxpayer/investor (TI) notifies their tax adviser and does not wait until collating data for their tax return.
This may require some client education by the adviser.
Two pieces of legislation are important to bear in mind. TCGA 1992 s.24 deals with disposals where assets are lost or destroyed, or become of negligible value. Paragraph 2 deals with Negligible Value Claims (NVC). This section treats the claimant as having sold and immediately reacquired the asset at the time of the claim. So ownership at the time of the claim is assumed.
S.24(2)(b) allows the claim to specify an earlier time than the date of claim when negligible value arose and (b)(i) states the claimant must have owned the asset at that time. The earlier time cannot be more than two years before the beginning of the year of assessment in which the claim is made (s.24(2)(b)(iii).
As regards share subscriptions, we have ITA 2007 s.131 (Share loss relief), 132 (Entitlement to claim) and 133 (How relief works).
While this section does not solely apply to EIS shares, s.131(2)(a) refers to EIS and s.131(3)(c) refers to TCGA 1992 s.24(1), i.e. NVC as mentioned above. S.132 allows the capital loss for qualifying companies to be offset against income of the year of loss, the previous tax year, or both (s.132(1)(a),(b),(c)).
So far, so good.
Advisers need to be careful concerning the provisions about owning the shares at the time of making a claim.
HMRC Help Sheet HS286 states, as regards NVCs, “The claim is made when we receive it” and “You must still own the asset when you make the claim”.
This refers to S.24 and being deemed to sell and immediately reacquire the asset. Clearly that cannot occur if the asset is no longer owned.
For example, the EIS company writes to the TI in April 2020. The TI diligently puts the letter in the folder (paper or digital) for the adviser as and when everything is ready. The EIS company is dissolved on 31.1.2021. The TI has collated and passed all tax information for 2020-21 to the adviser in August 2021. At that stage, no NVC has been made and the TI no longer owns the asset as it was dissolved seven months earlier. While all is not lost (claims arise regardless), the NVC route may be closed.
Client communication is key!