Where an individual acquires shares in a company qualifying for EIS reinvestment relief (under Schedule 5B TCGA 1992), the general rule is that he may defer any capital gains made in the previous three years (or the following year) until the EIS shares are sold.
This rule is subject to the caveat that the EIS relief can, in certain circumstances, be restricted – and the deferred gains then brought into charge – when the subscriber receives value from the company. One of these circumstances is when the subscriber receives the repayment of a ‘linked loan’. This is one owed to the individual subsequent to a subscription for shares, where the loan was made before the subscription and the repayment is “in pursuance of any arrangements for or in connection with the acquisition of the shares”.
The Upper Tribunal (UT) – in Segesta Limited v Revenue and Customs Commissioners  UKUT 176 (TCC), published on 1 June 2012 – has ruled on how the restriction will apply in practice where there is a such a loan.
The question before the tribunal was how many of the shares originally qualifying for relief should be disqualified. The taxpayer argued that the number of shares disqualified from the relief should be limited by reference to the value received. So, for example, if there is a share subscription for £10,000 and a loan repayment of £5,000, only half the shares should be disqualified from relief. The tribunal disagreed and held that all of the shares are disqualified from relief.
However, where there is more than one subscription for shares it may be possible for only one (or some) tranches to be disqualified from relief. Paragraph 13(2)(b) requires the repayment of debt to be “in pursuance of any arrangements for or in connection with the acquisition of the shares (emphasis added).” The tribunal held that:
“This is a reference to a particular subscription for shares. If therefore an individual had, for example, subscribed for shares in two tranches, only one of which was associated with a debt repayment in the relevant period, only that tranche would not be treated as eligible shares. The other tranche would remain as eligible shares, and relief would be available, always assuming that no other value was received in the relevant period.”
This is a significant decision as in the past practitioners may have assumed that relief would be denied on a pro-rata basis. It seems strange that an individual who subscribes for all his shares on the same day may lose all his relief whereas an individual who subscribes over several days may, in some circumstances, still retain part of his relief. EIS can be a complicated area where one small mistake can cost the taxpayer the whole of his relief. If in doubt, specialist advice could prevent a costly mistake.
For further information about EIS relief please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.