The BDO & Supporters Direct Guide to the Enterprise Investment Scheme for Investors
Correct as at 26/09/2012
Youve bought Enterprise Investment Scheme (EIS) shares in a Community Benefit Society connected to your football club. What now? Well, for a start, the taxman may owe you some money! This guide explains how to go about claiming your tax relief.
1. How to claim your tax relief
Firstly, you cannot claim your tax relief until you have received your ¢‚¬Å“EIS3 Certificate and Claim to Tax Relief¢‚¬. If you havent already got this, the Society should send it to you soon.
The EIS3 is a two part form. The first page has been completed and signed by the Society œ this is the EIS3 Certificate, and you should keep it safely, unless HMRC ask for it. The second page is the claim form.
If you have an accountant or tax adviser who deals with your tax returns for you, then simply send the whole EIS3 to them. If you dont use an accountant or tax adviser, dont worry œ it wont be difficult to do yourself.
It is important to remember that you will not necessarily get a cheque back from HMRC for 30% of the sum you have paid. If you normally have tax liabilities to pay (perhaps because you are self employed or have investment income), the relief may be deducted from those liabilities first.
1.1 Claiming EIS Income Tax Relief
EIS Income Tax Relief can be claimed:-
(a) In the tax year in which the shares were issued, or
(b) In the previous tax year (by ¢‚¬Å“carrying back¢‚¬ the relief)
Tax relief is given at 30% of the amount you paid for the shares, regardless of what rate of tax you pay, and the year in which you claim tax relief in shouldnt affect the amount of relief that you get.
However, you can only claim tax relief up to a maximum of the amount of tax you paid in the year, so make sure that you have paid enough tax to reclaim. Generally speaking, carrying back should result in you getting the relief earlier.You can elect to spread the relief over two years if you wish.
1.2 PAYE and EIS Income Tax Relief
Many taxpayers on PAYE dont have to complete a tax return. If this applies to you, then there are two ways in which you can claim your tax relief.
(a) If you want your PAYE code for the current year to be amended to allow relief, then tick the appropriate box and send the fully completed form to your tax office. An adjustment to your PAYE code will spread the relief out across the remaining pay days in the current tax year, by reducing the amount of tax you pay on your earnings.
(b) Alternatively, you can ¢‚¬Å“carry back¢‚¬ the relief to the previous tax year. Again, complete and sign the form and send it to your tax office. This should result in a lump sum repayment of 30% of the sum you paid, provided you paid sufficient tax that year, and have no other tax liabilities. If you dont normally get a tax return, HMRC may decide to issue one when you claim your EIS relief.
1.3 Claiming Tax Relief on your Tax Return
If you have to complete a tax return each year, then the best approach normally is to claim relief on the tax return. If you do a paper tax return, you will need to ask HMRC for the ¢‚¬Å“Additional Information¢‚¬ pages œ try searching for ¢‚¬Å“SA101¢‚¬ on the Revenues website: http://www.hmrc.gov.uk/forms/sa101.pdf
1.4 Losing Tax Relief
If you sell or otherwise dispose of your shares, or redeem them, before the ¢‚¬Å“Termination Date¢‚¬, you may have to repay any income tax relief you received. The ¢‚¬Å“Termination Date¢‚¬ is shown on the EIS3 Certificate. You may also have to repay the tax relief if the Society ceases to be a qualifying EIS company before the termination date.
2. EIS Deferral Relief
The EIS3 form also allows you to claim ¢‚¬Å“Deferral Relief¢‚¬.
If you have made no taxable capital gains in the three years preceding your investment, and make none in the year following your investment, then this section will not apply to you.
If you do have capital gains, you may wish to claim deferral relief. The EIS investment that you have made can be set off against the gain to reduce the capital gains tax liability.
If you have an accountant or tax adviser who looks after your tax returns, it would be best to send the whole form to them. If not, complete the deferral relief section and send it to your tax office.
It is important to remember that if you claim Deferral Relief you will have to repay the CGT tax saved when you dispose of your EIS shares. Additionally, you could end up worse off if you defer gains which were covered by your annual CGT exemption or which were taxed at a lower rate than the CGT rate at the time you dispose of the shares.
3. Capital Gains Tax Disposal Relief
Broadly, EIS shares are exempt from capital gains tax when they are disposed of, provided they have been held for three years and income tax relief has been given and not withdrawn. However, this probably wont be relevant to you. The Society Rules provide that shares cannot be transferred except on death and bankruptcy and then only at the face value, so no capital gains are likely to arise. Similarly, if the Society redeems your shares, your proceeds will be no more than you paid for the shares, so no gain will arise.
4. Inheritance Tax
EIS shares will normally be exempt from Inheritance Tax as they should qualify for Business Property Relief, provided they have been held for two years at the time of death. You do not need to claim this relief now.
5. Loss Relief
If you dispose of the shares at a loss, you may be able to claim loss relief, either against capital gains or against income. The amount of the loss will be the proceeds you receive less the net amount you paid after deducting income tax relief.
6. Further Information
(a) How much tax relief will I get?
30% of the amount you paid for the shares, unless you have paid less tax than that.
(b) How do I find out how much tax Ive paid?
If you are an employee on PAYE, then your P60 for last year will show the amount of tax you paid that year. A recent payslip will give you a good idea of the amount of tax you will pay this year. If you are self employed, its best to ask your accountant about this. If you dont have an account, your tax paid figure will be on your Self Assessment Tax Calculation. You can also take account of tax paid on pensions, investment income, bank interest, rental income etc, but not dividends.
(c) When will I get my tax relief?
This depends on your personal circumstances and how you claim relief. Generally, carrying back the relief will result in getting the tax relief sooner.
(d) Is there any benefit to spreading the relief over two years?
This will only be advantageous if you paid too little tax to reclaim the full amount in one year.
(e) How will I get my tax relief? A cheque from HMRC?
If you claim relief on your tax return, you may get a cheque. Alternatively, enter your bank account details on the form, and a direct payment will be made to your bank account. This is generally quicker than a cheque. If you claim relief through your PAYE code, relief will be spread out over the remaining pay days in the current tax year. If you normally have a tax liability each year, HMRC may simply reduce your next tax bill.
(f) How long do I have to keep the shares?
To avoid losing tax relief, you must keep the shares until the ¢‚¬Å“Termination Date¢‚¬ shown on the EIS3.
(g) What is the Termination Date?
The Termination Date is the date until which you must hold the shares if you want to retain your tax reliefs. The date is shown on the EIS3. It is three years after the later of
i) The date the shares were issued, and
ii) The date the Society started trading
(h) Whats the deadline for claiming tax my relief?
You have until 5 years after 31 January following the end of the tax year in which the shares were issued. For shares issued between 6 April 2012 and 5 April 2013, that means 31 January 2019. So, no rush, but theres nothing to be gained by delaying your claim.
(i) How do I find my tax reference and other details for the form?
The information you need should be on your P60 and/or Tax Return.
(j) I dont normally receive a tax return œ will HMRC send me one if I claim this tax relief?
Filling in a tax return is not a requirement of the EIS. However, it is possible that HMRC will send you a tax return to complete when you send in your claim, in which case it will have to be completed and filed, but this shouldnt put you off claiming the tax relief you are entitled to.
This document has been carefully prepared and is based upon our understanding of tax legislation in force at the time of writing. Tax legislation does change from time to time, and it is the investors responsibility to check their personal tax position. Neither BDO LLP nor Supporters Direct can accept any responsibility for any loss incurred by any individual as a result of information contained in this document. Individuals should take their own advice concerning their tax liabilities where appropriate.