VCM26360 - EIS: income tax relief: Value received: amount of reduction of relief

ICTA/S300 (1A) & (1B); ITA/S213; ITA/S218; ITA/S220

Where relief falls to be reduced because the investor has received value from the company, the amount of the reduction is a sum equal to tax at the savings rate (20%) on the amount of the value received or the amount of relief attributable to the shares, whichever is the smaller.

Example 1

In March 1998 Mr Dooley was issued with shares for which he had subscribed £10000 and received £2000 relief. On 1 June 1999 he receives value of £7500. Tax on £7500 at the lower rate of 20% is £1500 and that is the amount of relief withdrawn.

If Mr Dooley had only had tax liability for that year of £1000, he would have only received that amount of relief. In this situation the formula at ICTA/S299 (4) and ITA/S220 is applied to the figure of £1500 and consequently only £750 relief is withdrawn. The effect of this is that his relief is the same proportion as if he had been able to claim all the available relief on his subscription.

It may be that the value received falls within the period of restriction ICTAa88/Period C (ITA) (see VCM20600) related to more than one issue of shares. In that case the receipt is related to the earliest such issue as far as possible.

Example 2

In March 2001 Mr Shah was issued with shares for which he had subscribed £3000, and he obtained full relief for this. In January 2002 he subscribed £10000 for further shares in the same company. Because his income tax liability for 2001-02 was small he obtained relief of £400 only for this subscription.

In May 2002 he receives value from the company of £4000. On the first issue the apportioned amount of value received is £4000 x £3000 / £13000 = £923, so the relief withdrawn is the lesser of £923 x 20% = £184 or £3000 x 20% = £600, meaning relief of £184 is withdrawn.

On the second issue the apportioned amount of value received is £4000 x £10000 / £13000 = £3077, so the relief withdrawn is the lesser of £3077 x 20% = £615 multiplied by £400 / £2000 = £123, or £400, meaning relief of £123 is withdrawn.