October 29th, 2012 / Insight posted in

Keeping tax relief on a failed firm

NC writes: One of the businesses I run is being wound down. However, an outside shareholder received tax relief under the Enterprise Investment Scheme (EIS) on his investment in the business a couple of years ago, so I am wary of winding up the business if it upsets this relief. Should I keep the company alive to protect his tax relief?

There are two issues to consider, writes Tim Stovold, tax partner at Kingston Smith LLP. One is the potential withdrawal of the EIS income-tax relief. The other is what the shareholder can do with the loss on his investment.

If the relief was claimed a couple of years ago, the investor is still within the three-year qualification period. During this period, if the company ceases to trade, the EIS relief is normally withdrawn in full. If, however, the company still meets the trading requirement, there are circumstances in which the relief may not be withdrawn on the eventual cessation of the trade.

In summary, if the company is still trading, you should be able to preserve the income-tax relief the investor has received by being careful about how you wind up the company. However, if the trade has already ceased it may be too late to preserve the tax relief.

On winding up, the investor will have a capital loss that can be set against current year capital gains.

Alternatively, the investor could make a claim to treat the capital loss as an income-tax loss, which could then be set against income of the same or previous year or both. This has the potential to save the shareholder up to 50% income tax on the value of the loss if the loss is realised after April 5, 2010, which could mean tax relief at an effective rate of 60% of his investment.