VCM26100 - EIS: income tax relief: amount of reduction of relief on disposal

ICTA/S299 (4); ITA/S209 (3)

Where relief has to be reduced following a disposal, the amount of the reduction is:

• the amount of relief attributable to the shares,

or

• a sum equal to tax at the savings rate (20%) on the amount or value of the consideration received,

whichever is the smaller.

But if the relief attributable to the shares is less than tax at the lower rate on the amount originally subscribed, for example because that amount exceeded the maximum amount relievable, the reduction in the relief is to be restricted proportionately.

Example 1

Miss King subscribed £200,000 for shares in Lovely Fashions Ltd issued to her in 2004-05, and obtained relief of £40,000. Two years later she sells the shares under a bargain at arm's length for £110,000.

20% of £110,000 is £22,000 and this, being less than £40,000, is the amount of relief to be withdrawn. (She may be able to claim VC loss relief on the net loss of £72,000, i.e. £90,000 less the remaining tax relief of £18,000, - see VCM45000 onwards.)

Example 2

Suppose Miss King's subscription had been £250,000. Because the maximum amount on which she could get relief was £200,000, her relief would have amounted to £40,000 only. That is four fifths of a sum equal to tax at the lower rate on £250,000, so when she sells her shares for £110,000 the amount of relief to be withdrawn is not £22,000 but only £17,600.