VCM47450 - VC loss relief: mixed holdings: disposals involving relief shares: example

ICTA88/S576 (1), (1A) and (1B)

A taxpayer subscribed £50,000 for 50,000 new shares in an EIS company. The shares were issued on 1 June 1998 and were the only shares acquired by the investor in 1998-99. The taxpayer claimed EIS deferral relief on all £50,000. The shares are relief shares as referred to in the second paragraph of VCM47050.

On 1 July 2002 the taxpayer bought a further 25,000 shares in the EIS company from a third party for £30,000. These shares did not attract any EIS relief.

In 2004 the taxpayer subscribed for a further 75,000 shares in the EIS company at a cost of £75,000. The shares were issued on 1 April 2004. The taxpayer did not on this occasion claim any EIS relief although the company still satisfied the relevant conditions.

The taxpayer has the following separate blocks of shares in the EIS company:

• 50,000 relief shares acquired on 1 June 1998 on which ICTA88/S574 relief may be due, cost £50,000.
• 25,000 shares acquired on 1 July 2002 which are not relief shares on which relief under ICTA88/S574 will not be due, cost £30,000.
• 75,000 shares acquired on 1 April 2004 which are not relief shares on which ICTA88/S574 relief may be due, cost £75,000.

The 150,000 shares are all of the same class and are held by the taxpayer in the same capacity. They comprise a holding within the definition in ICTA88/S576 (5).

The company is unsuccessful and goes into decline. On 1 May 2005 the taxpayer sells 60,000 shares at arm’s length for £20,000.

On 1 July 2005 the taxpayer sells another 20,000 shares at arm’s length for £5,000.

The company continues to decline and on 1 October 2005 a receiver is appointed. The taxpayer makes a negligible value claim on 1 December 2005 and Shares Valuation agree that the taxpayer's remaining 70,000 shares in the company are worthless then.

The taxpayer claims VC loss relief under ICTA88/S574 in respect of the three disposals of shares on 1 May 2005, 1 July 2005 and 1 December 2005. The company is a qualifying trading company, see VCM45600. The amount of VC loss relief available is as set out below.

DISPOSAL ON 1 MAY 2005

The taxpayer’s holding out of which the disposal was made on 1 May 2005 included relief shares. The normal ICTA88/S576 (1) identification rule of last in first out is overridden by the ICTA88/S576 (1B) so identification is on a first in first out basis. The 60,000 shares sold then are identified.

• Firstly with the 50,000 shares acquired on 1 June 1998.
• Secondly with 10,000 of the 25,000 shares acquired on 1 July 2002.

The loss on the disposal of the 50,000 shares acquired on 1 June 1998 is:

VC loss relief under ICTA88/S574 is available because the taxpayer subscribed for the shares. The amount subscribed for the shares was £50,000 so the relief due is not restricted by the comparison referred to at step 4 of VCM47150.

The loss on the other 10,000 acquired on 1 July 2002 is:

VC loss relief under ICTA88/S574 is not available because the taxpayer did not subscribe for the shares. This loss is available as a capital loss.

DISPOSAL ON 1 JULY 2005

The taxpayer’s holding out of which the disposal was made on 1 July 2005 comprised the remaining 15,000 of the shares bought on 1 July 2002 and the 75,000 shares acquired by subscription on 1 April 2004, but did not include any relief shares. The 20,000 shares sold then are identified by the normal ICTA88/S576 (1) last in first out rule with the shares acquired by subscription on 1 April 2004. The loss on the shares sold on 1 July 2005 is:

VC loss relief under ICTA88/S574 is available because the taxpayer subscribed for the shares. The amount subscribed for the shares was £20,000 so the relief due is not restricted by the comparison referred to at step 4 of VCM47150.

DEEMED DISPOSAL ON 1 DECEMBER 2005 FROM NEGLIGIBLE VALUE CLAIM

The 70,000 shares deemed to have been sold and reacquired on 1 December 2005 because of the taxpayer’s negligible value claim comprise the total remaining shares. Of those shares 15,000 were acquired on 1 July 2002 and 55,000 on 1 April 2004.

The loss on the 55,000 shares acquired on 1 April 2004 is:

VC loss relief under ICTA88/S574 is available because the taxpayer subscribed for the shares. The amount subscribed for the shares was £55,000 so the relief due is not restricted by the comparison referred to at step 4 of VCM47150.

The loss on the 15,000 shares acquired on 1 July 2002 is:

VC loss relief under ICTA88/S574 is not available because the taxpayer did not subscribe for the shares. This loss is available as a capital loss.

So of the total allowable losses on the disposals of the shares, £130,000 (£33,333 + £8,667 + £15,000 + £55,000 + £18,000) VC loss relief of £103,333 (£33,333 + £15,000 + £55,000) is available. The £26,667 balance of the loss is available as a capital loss.