The FTT dismissed the tax payer’s appeal against HMRC’s decision not to allow a capital gains tax exemption claimed in respect of his enterprise investment scheme (‘EIS’) shares.
The background to the case was in January 2005, Mr Ames invested £50,000 in qualifying EIS shares. Mr Ames did not have any taxable income in the 2004-05 tax year and as such did therefore not claim EIS income tax relief.
In June 2011 Mr Ames sold the shares, making a gain of £272,540. He did not include the gain on his 2011-12 Tax Return, but included a white space note referring to the disposal, clarifying that the shares had been held for greater than 3 years and therefore that he believed the gain to be exempt.
HMRC amended the Return to include the gain as they contended that a capital gains tax (‘CGT’) exemption was only available on disposal of the shares if EIS relief had originally been claimed.
The technical point at hand here is that EIS CGT exemption is restricted under TCGA92 s.150A(3) if the investor does not receive full income tax relief on their subscription, unless the only reason full income tax relief cannot be given is because the claim reduces the investor’s income tax liability to nil i.e. the EIS income relief was more than needed to eliminate the income tax liability.
However, for an exception to apply at all an amount of EIS relief must be attributable to the shares and the individual’s liability to income tax must have been reduced by an EIS income tax relief claim.
As there had been no reduction in Mr Ames’s income tax attributed to the shares the CGT exemption could not apply. Ironically, the implication (as acknowledged in the decision) is that someone who has £1 of taxable income relieved by an EIS investment would be entitled to a 100% CGT exemption, whereas someone who has zero taxable income would not benefit from this!
Individuals making EIS investments should therefore ensure (where possible) that they have made an appropriate EIS income tax relief claim and that their income tax has been reduced as a result. For individuals whose income is below their personal allowance, as in Mr Ames’s case, they should consider disclaiming their personal allowance in order to uncover their taxable income in order for an EIS claim to be made. Unfortunately Mr Ames was outside of the time limit to make this claim.
Please contact us should you wish to discuss this case or any aspects of making EIS investments.