EIS: deferral relief: shares issued on or after 6 April 1998: identification of disposals: examples
An investor subscribes £80,000 for 80,000 shares in an EIS company that are all issued to him on 3 November 1998. He obtains Income Tax relief on £80,000 and £60,000 deferral relief in respect of a gain from a disposal of land. 50,000 of the shares are sold on 4 April 2002.
Following VCM23160 the amount of the deferred gain that accrues at the time the 50,000 shares are disposed of is calculated as follows:
- the £80,000 Income Tax relief is attributable equally to all 80,000 shares,
- the £60,000 deferral relief is attributable equally to all 80,000 shares.
The numbers of shares falling into the categories described in VCM23160 are:
The 50,000 shares disposed of are identified as 50,000 of the 80,000 shares to which both deferral relief and Income Tax relief are attributable to them, (d).
£37,500 of the deferred gain (50,000 / 80,000 x £60,000) accrues on 4 April 2002. (Details of the withdrawal of Income Tax relief are not covered by this example).
On 25 May 2003, Mary disposes of 24,000 of her holding of 34,000 ordinary shares in Z Ltd in an arm’s length sale. She had acquired the shares, which are all of the same class, as follows:
- on 1 September 1997, she was issued with 10,000 shares, in respect of which she obtained Income Tax relief,
- on 5 October 1998, she was issued with 5,000 shares, in respect of which she obtained both Income Tax relief and deferral relief,
- on 5 October 1998, she acquired 4,000 shares by private sale from her brother, to whom they had been issued on 1 September 1997,
- on 16 January 1999, her husband transfers 9,000 shares to her. These shares had been issued to him on 5 October 1998, and he had obtained Income Tax relief in respect of the subscription,
- on 25 November 1999, she was issued with a further 6,000 shares, in respect of which she obtained deferral relief.
No Income Tax relief had been withdrawn prior to the disposal.
For the purposes of the identification rules, the 9,000 shares that were transferred to Mary on 16 January 1999 are treated as having been acquired by her on 5 October 1998.
Following VCM23160, the relevant attributions of relief to the shares in her holding are as below, (the dates shown being those which are applicable for identification purposes).
The 24,000 shares that Mary disposes of are identified in the following way. First, TCGA92/SCH5B/PARA4 (3) identifies the 10,000 shares she acquired on 1 September 1997 and 14,000 of the shares she acquired (or is treated as having acquired) on 5 October 1998. TCGA92/SCH5B/PARA4 (4) is now applied to determine which 14,000 of the 5 October 1998 shares are treated as disposed of. This provision identifies the 4,000 shares to which no reliefs are attributable, 9,000 shares to which Income Tax relief (but not deferral relief) is attributable and 1,000 of the 5,000 shares to which both Income Tax relief and deferral relief are attributable.
Mary had subscribed £7,500 for the 5,000 shares that were issued to her on 5 October 1998, and in respect of that subscription she claimed deferral relief for a chargeable gain of £4,000 which accrued to her on 10 November 1998. £800 (£4,000 x 1,000 / 5,000) of the deferred gain becomes assessable on 25 May 2003 when she disposes of 1,000 of these 5,000 shares. (Details of the withdrawal of Income Tax relief are not covered in this example.)
An investor subscribes £200,000 for 400,000 eligible shares in a company that are issued on 1 February 1999. These are the only shares held by him in that company. He makes a claim to set off £50,000 of the amount subscribed against a chargeable gain which accrues to him on 8 October 1997, £30,000 against a chargeable gain accruing to him on 10 December 1998, and £60,000 against a chargeable gain accruing to him on 28 December 1999. No other gains accrue to him during the period beginning with 1 February 1996 and ending with 1 February 2000, so he cannot set off the whole of the amount he subscribed for the shares against chargeable gains. On 4 April 2001, he disposes of 100,000 of the shares.
As he has disposed of a quarter of the holding, chargeable gains equal in amount to a quarter of each of the original gains accrue on 4 April 2001. So a chargeable gain of £12,500 becomes assessable in respect of the gain deferred from 8 October 1997, a chargeable gain of £7,500 becomes assessable in respect of the gain deferred from 10 December 1998 and a chargeable gain of £15,000 becomes assessable in respect of the gain deferred from 28 December 1999.