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EIS and SEIS tax reliefs: What happens if you don’t adhere to the rules?

The generous tax benefits of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) have been covered in other blogs and this time we focus on what can go wrong if the rules are not followed or time limits for making claims are not adhered to.

A brief guide of the EIS and SEIS tax reliefs

The tax reliefs on qualifying investments are summarised as follows:

  1. Generous income tax reliefs of up to 30% for EIS and 50% for SEIS of the qualifying investment may be available.
  2. Gains on EIS/SEIS shares could be free of capital gains tax (CGT).
  3. Other capital gains can be deferred if the gain is reinvested in qualifying shares and certain other conditions are met, only crystallising when the EIS/SEIS shares themselves are sold.

There is also a reinvestment relief under SEIS - if certain time and investment limits and other conditions are met, a gain matched with qualifying SEIS expenditure can lead to 50% of the gain being exempt from CGT.

Due to the nature of EIS and SEIS investments, it is also possible in some cases, through a separate relief, to get an element of relief for capital losses against income for tax purposes. 

Such losses would be after adjusting for any income tax relief already claimed on the investment itself.

The above summary is very broad and there are many conditions to meet to successfully secure the reliefs.

What happens if you don’t adhere to the rules?

The recent first tier tax tribunal case of Kaljinder Singh Kalay v HMRC was a sad reminder that while the EIS/SEIS tax reliefs are generous, it is very easy to slip up as the rules are complex and stringent.

The case concerned the interplay of the first two reliefs mentioned above.

One of the many rules relating to EIS/SEIS relief is that to claim the CGT relief (mentioned in point two above), the taxpayer must have claimed the income tax relief (mentioned in point one) when the investment was originally made.

The taxpayer sold some shares and made an EIS disposal relief claim to mitigate the substantial CGT liability arising on the gain. However, the shares had been issued several years earlier and an EIS income tax relief claim had not been made at the time or within the appropriate time limits.

The taxpayer attempted to put in a late income tax relief claim to benefit from the CGT relief on the sale of the shares.

The first tier tax tribunal agreed with HMRC that, as a valid and timely claim for income tax relief had not been made, the CGT relief was not available.

This is a very unfortunate outcome for the taxpayer concerned. The lesson to learn here is that if you are considering making an EIS/SEIS investment, be very careful to understand the rules and take professional advice in a timely manner.

The next step

At UHY Hacker Young (Brighton) we are able to advise on EIS and SEIS as all other areas of UK tax relief for investors. Please contact Charlie Owen on c.owen@uhy-uk.com or your usual UHY adviser to discuss.

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