Letter notifying reduction of EIS relief

If you make a qualifying investment under the enterprise investment scheme (EIS), there are a number of things that can happen during the minimum holding period that lead to relief being reduced or fully withdrawn. You need to notify HMRC when this happens.

EIS basics

There are a number of events that can lead to relief being partly or wholly withdrawn. The events are listed in Chapter 6 Income Tax Act 2007. You must notify HMRC if any of the following occur:

• you dispose of the shares before the termination date
• a put or call option is granted over any of the shares
• you receive value from the company (this applies to the period of twelve months prior to the share issue right up to the termination date)
• the issuing company redeems or repurchases shares from other non-EIS, seed enterprise investment scheme or corporate venturing scheme shareholders
• the issuing company acquires a trade you previously carried on, or a company you previously controlled
• relief is found not to have been due in the first place.

There are also ongoing qualifying conditions related to the initial investment which have to be satisfied at the time of the investment, e.g. you cannot be connected with the issuing company, the company must be a trading company, etc., that would also lead to a reduction of relief if circumstances changed before the termination date; however, we are looking at specific events.

Early disposal

By far the most common of the events seen in practice is the early disposal of shares. The loss of tax relief might be a secondary consideration if the company has been successful, and you get the chance to realise a large gain. If your shares are sold for an amount equal to, or greater than the original subscription price, relief will be withdrawn in full.

However, if the shares are sold at a loss, relief is only partially withdrawn as follows:

Relief withdrawn = sales proceeds – original rate of relief

Example

Bill bought 1,000 EIS shares for £100,000 in April 2022 - claiming £30,000 in income tax relief, but the value of the company drops and Bill decides to cut his losses and sell them to a business turnaround specialist for £30,000 in March 2024. The relief withdrawn will be £30,000 x 30% = £9,000.

Procedure

You must notify HMRC of the event as soon as you can. Clawback of EIS relief is not made under self-assessment, but by a special assessment, and so HMRC will need to calculate and send this to you in order to settle it. Use our template letter to make the notification. We also advise you to include a calculation showing how much relief needs to be withdrawn, and copies of the original EIS3 certificates.