EIS loss relief on disposal of shares

Question:

I intend to dispose of some EIS shares for which I received capital gains tax deferral but not income tax relief.I would like to understand the calculation if I sell the shares at a loss.For example I invested £100,000 and deferred capital gains at 40%( rate at time of investment).

I sell for £10,000.What capital gains tax is due and what income tax relief is available. If I sell the shares as a non-resident can I avoid the capital gains and still benefit from the income tax relief to offset against rental income from the UK.

Thanks

Answer:

If you're UK resident the provisions state that all shares which qualify for EIS relief are treated as shares in a 'qualifying trading company' for the purposes of the special income tax loss relief.

A claim for income treatment is in respect of the capital loss incurred on the disposal of the shares. Therefore you compute the capital loss in the usual way(ie proceeds less costs). You can then choose whether to offset this against income or treat it as a capital loss.

The whole of the deferred gain becomes taxable for the tax year in which the shares are sold.

If you're non UK resident it's worthwhile noting that the deferred gain is brought back into charge when you become non-resident within the period beginning with the issue of the shares and the third anniversary of the date on which the shares were issued.

If you waited until after this period before becoming non resident in principle the shares could be sold with no deferred gain chargeable.

However, as a non resident the capital loss would not be a valid capital loss and therefore no income tax relief would be available.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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