October 30th, 2012 / Insight posted in

Investors want to keep tax relief

MW writes: I am the managing director of a small technology company that has received a takeover offer. It is good news for our shareholders, but some of them have received tax relief under the Enterprise Investment Scheme (EIS) and are worried that this relief will be lost if the sale goes through before they have held the investment for three years. They have suggested we include some sort of loan stock option for the shareholders so they can hold on to their EIS relief. Is this possible?

If an investor who has qualified for the EIS does not hold the shares for three years, the tax relief is lost, writes Chris Lane, a partner at Kingston Smith LLP. Furthermore, a shareholder may also lose his EIS relief if he receives any value from the company during that period. This could be a loan or some other benefit. The issue of loan stock by the company would fall under this category and lead to the loss of EIS tax relief.

While the 20% (now 30%) income tax relief received by shareholders is a useful rebate to reduce the risk of the original investment, this should be viewed as a safety net in case the investment turns sour. If the investment is successful, the safety net is not required and has to be given back.

Although this will mean a return of the 20% income tax relief and the loss of relief from any capital gains tax, the shareholders will still be making a gross gain on their investment.

There is a requirement to inform the tax office within 60 days of any event occurring that would lead to a clawback of the EIS relief. The mechanism for the recovery of the relief would be the submission of the shareholder’s tax return with details of the disposal.

Of course, one way to maintain the relief would be to delay the deal until the three years have passed.