How to save tax on failed firm
PM writes: My business has failed to get off the ground and I am keen to resolve matters in the best way for the investors, who have lost all the money they put in. They received EIS tax relief on the investment — will they lose it now?
The Enterprise Investment Scheme (EIS) is designed to encourage investment in early stage companies and includes loss relief for investments that go bust, writes Jon Sutcliffe, partner at Kingston Smith LLP.
Your EIS investors will have been intending to hold the investment for at least three years so it can qualify for capital gains exemption, and so they do not lose the 30% (20% before April 2011) income tax relief, which they will have received when they originally invested.
That tax relief is withdrawn if the investor becomes connected with the company, or if the company ceases to be an EIS qualifying one, which can occur for many reasons outside the control of the individual investors. The income tax relief can also be reduced or withdrawn if the investor disposes of the shares. However, a company going bust does not count as disposal of shares.
In this case, the investors are able to claim a capital loss for the amount invested, less the income tax relief received. As an alternative to claiming relief for that loss against other capital gains, they would normally have the option of claiming relief against their income. This will reduce the tax bill on their other income in the year the investment becomes of negligible value, usually with an option to carry the loss back to the previous tax year.
The requirement to be of negligible value is usually satisfied by the company going into administration or liquidation with no prospect of a return to shareholders. You should now activate this process and let the investors know.