Ordinarily when a loss is realised in relation to a shareholding, this gives rise to a “capital loss” in the year that the loss arises or is claimed. The capital loss can generally be used against gains of the same tax year or carried forward indefinitely to use against future capital gains.
However, where the loss relates to shares that have been “subscribed for” in a trading company (i.e. brand new shares issued by the company in exchange for payment to the company for those shares – rather than “second hand” shares which have been purchased on the market), it may be possible to set this loss against income – which is often taxed at higher rates – so this relief can be more valuable. Typically, this loss relief can apply to shares acquired under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).
Many income tax loss reliefs are restricted to a maximum of £50k per year or 25% of your income, whichever is higher. However, where the losses relate to EIS/SEIS share subscriptions, this cap does not apply. Therefore, if you have invested in EIS/SEIS products which have not gone so well, you might be due some additional income tax relief to that which you received upfront.
The relief can be due where the shares have been sold at a loss, where the company has been dissolved, or where the shares continue to be held, but where they have become of “negligible value” – this requires a specific claim to be made to HMRC.
For example, if you are an additional rate taxpayer and you subscribed £40k into an EIS investment, assuming you received income tax relief at 30% on subscription (£12k), you would have realised a net “economic” loss of £28k that you may then be able to offset against your income. This could result in a further reduction in your tax liability of £12,600 if the shares are now worthless. Therefore, on an investment of £40k, you would have realised an overall net loss after income tax relief upfront and income tax loss relief of £15,400. Your loss would therefore be 38.5% of the original investment.
The loss relief may be available for the year that the loss arises, or the previous tax year – or both (it’s an all or nothing claim so you can’t choose to offset some against one year and some against the other) therefore care needs to be taken to ensure optimum relief is obtained. Of course, you also need to have the income to make use of the loss, and therefore timing is critical in terms of when the claim for loss relief is made.
If you have invested via an EIS portfolio, you look at each of the underlying investments in that portfolio to determine whether relief is available – i.e. loss relief may still be available even if the overall portfolio value may not be down. Also – bear in mind that if you have claimed EIS deferral relief on an old capital gain and rolled this into the EIS shares, selling those shares would trigger that old gain to be revived – so that is something else to consider when thinking about this.
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