Let’s assume you purchased shares in an enterprise investment scheme (EIS) three years ago and they have fallen in value.
What tax relief could you claim?
If you invest in a qualifying company under the EIS scheme then you are in entitled to a tax credit of 30% of the amount you invest against your income tax bill. This can be used in the year you make the investment or you can claim to have it carried back to the previous year
If you hold onto the shares for 3 years and then sell them for a gain then this will be exempt from Capital Gains tax
However, what is the situation if you make a loss when you sell the shares after holding them for 3 years?
You have the opportunity to make a special claim to convert the CGT loss into an income tax loss.
For example, you purchase shares worth £20,000 3 years ago in a company that qualified for EIS. You received a tax credit initially of £6,000 (£20,000 x 30%) which is good news. The shares have fallen in value and you have been offered £12,000 to buy them all 3 years later.
The Capital Gains Loss is calculated as follows: Purchased £20,000 and sold for £12,000 = £8,000 less the tax credit originally received of £6,000 = £2,000 Capital Gains Loss. If you are a higher rate tax payer of 40% and elect to set £2,000 against your income tax then you will save £800. So to summarise you will be “out of pocket” by £1,200 on your initial investment of £20,000 – not to bad after all!
It is always important before you take any action that you obtain professional advice. If you have any questions in respect of the above, then please do not hesitate to contact our tax experts by sending an email to email@example.com