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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: income tax relief: withdrawal or reduction of EIS relief: disposal of shares

ITA07/S209

Where relief has to be reduced following a disposal, the amount of the reduction is:

  • the amount of relief attributable to the shares,

or

  • a sum equal to tax at the original EIS rate (20% or 30% depending on the year the shares were acquired) on the amount or value of the consideration received,

whichever is the smaller.

But if the relief attributable to the shares is less than tax at the EIS rate on the amount originally subscribed, for example because that amount exceeded the maximum amount relievable, the reduction in the relief is to be restricted proportionately.

Guidance on the attribution of EIS relief to shares is at VCM14020 and on the identification of shares on a disposal is at VCM16020.

Example 1

Miss King subscribed £200,000 for shares in Lovely Fashions Ltd issued to her in 2009-10, and obtained relief of £40,000 (£200,000 at 20%). Two years later she sells the shares under a bargain at arm’s length for £110,000.

The withdrawal is calculated at the EIS rate applicable to the year in which relief was given, rather than the EIS rate applicable at the time relief is withdrawn - so in this case, 20%.

20% of £110,000 is £22,000 and this, being less than £40,000, is the amount of relief to be withdrawn. (She may be able to claim Share Loss Relief on the net loss of £72,000, i.e. £90,000 less the remaining tax relief of £18,000, - see VCM70000 onwards.)

Example 2

Suppose Miss King’s subscription had been £250,000. Because the maximum amount on which she could get relief was £200,000, her relief would have amounted to £40,000 only. That is four fifths of a sum equal to tax at the relevant EIS rate on £250,000, so when she sells her shares for £110,000 the amount of relief to be withdrawn is not £22,000 but only £17,600.

Part disposals

If the disposal is of part only of the holding of shares we need to decide how much of the relief attributable to the holding relates to the shares disposed of. If the shares are disposed of for the same amount or more than the individual paid for them, the relief withdrawn will be a proportionate amount of the relief originally given. If they are disposed of for less than the individual paid for them, (providing the disposal was by way of a bargain at arms length), only relief equal to tax at the EIS rate on the amount of consideration received is withdrawn. The following examples (which assume that disposals are at arms length) illustrate how the amount of relief to be withdrawn is calculated.

Example 3

In 2010-11 Mr Larkin subscribed £100,000 for 100,000 shares in Sussex Crafts Ltd and obtained relief of £20,000. Two years later he disposes of 25,000 shares for a consideration of £30,000. The relief is apportioned across the 100,000 shares so that £5,000 is attributable to the 25,000 shares sold, leaving £15,000 attributable to the 75,000 shares retained. Since the relief of £5,000 is less than 20% of the consideration of £30,000, it is withdrawn in full.

Example 4

Suppose that Mr Larkin receives only £10,000 for the 25,000 shares that he sells. The apportioned relief of £5,000 exceeds 20% of the consideration of £10,000, so only £2,000 of the relief attributable to those shares is withdrawn. As before, the relief apportioned to the remaining 75,000 shares is £15,000; if those shares are later disposed of at a profit no part of the remaining £3,000 of relief relating to the shares already disposed of can be withdrawn on account of the later disposal.

Example 5

Suppose that Mr Larkin had subscribed £600,000 for his 100,000 shares, obtaining the then maximum relief of £100,000, being an amount equal to tax at 20% on £500,000. Two years later he disposes of 25,000 shares for a consideration of £100,000.

The relief of £100,000 is apportioned between the shares, so that £25,000 is apportioned to the 25,000 shares and £75,000 to the 75,000 shares. So the comparison is between the apportioned amount of the relief, that is, £25,000, and 20% of £100,000, being £20,000, and the amount to be withdrawn is the lesser of the two, £20,000. The remaining £75,000 of relief related to the shares disposed of cannot be withdrawn as a result of any later disposal of the other shares at a profit.