In January 2007 an individual who is a higher rate taxpayer grants an option over some land for £500K. There is no base cost and no taper relief available and the annual exemption is used elsewhere. CGT on this gain, without reliefs amounts to £500K @ 40% = £200K.
In July 2007 said individual subscribes by cash the sum of £100K in fully paid up equity shares in an EIS qualifying company. Assume that all the qualifying conditions are met for deferral relief to apply.
Taxpayer applies for EIS deferral relief against the January 2007 gain, and recovers 40% x £100K, which is to say £40K.
In July 2009, the option is exercised, the land is sold, and the total gain is £2M (including the £500K). No Entrepreneurs relief is available, and the annual exemption is used elsewhere.
My understanding is, without the complication of the EIS claim or any other planning undertaken, the simple calculation of the gain at the second event would be £2M x 18% less £200K, = £160K. (Are we agreed on that?)
How does the earlier EIS claim affect this calculation now?
Clint Westwood
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Don't shoot yourself Clint, all may not be lost
Deferral relief has potentially been lost because, as Clint clearly understands, at the point the option is exercised the gain calculated initially is blotted out. The consideration received on the grant of the option is added to the proceeds of sale received on the exercise of the option and the aggregate amount is taxed as a single transaction taking place, in the example given, in July 2009. At first sight, the individual referred to by Clint has deferred a 2007/08 gain that no longer exists!
EIS deferral relief is available where the qualifying EIS shares are acquired (i.e. issued to the individual) at a 'qualifying time'. Sch 5B, Para 1(3) defines a qualifying time as being either
(a) any time during the period beginning 12 months before the date of the disposal giving rise to the gain to be deferred and ending 36 months thereafter, or
(b) any such time before the beginning of the abovementioned period or after it has ended "as the Board may by notice in writing allow".
Here the shares appear to have been issued approx 2 years before the date of disposal as defined by the TCGA and therefore the only route open to the taxpayer is to plead his case (relying on (b) above) for an extension to the qualifying time so as to embrace the date of investment in July 2007. Full facts surrounding both the disposal and the investment would have to be spelt out. It would not seem unreasonable for the qualifying time to be extended in such a case . . . but who are am I to say! HMRC's VCM Manual paras VCM38030 & 68060 give limited guidance as follows:
HMRC will extend the time limits where the claimant can show that he or she:
•had a firm intention to comply with the time limits, but
•was prevented by some fact or circumstance beyond his or her control from complying, and
•acted as soon as he or she reasonably could after ceasing to be so prevented.
It is a question of fact and degree and each case is considered on its own merits. Examples of circumstances outside the claimant's control might include death or serious illness of a vital party at a crucial time, unsettled disputes or litigation or unexpected delay in receipt of disposal consideration.
Clint's case does quite not fit within the above but seems to fit within the spirit of the legislation.
A final thought. Before approaching HMRC, it will be important to establish just when the individual's shareholding was entered in the register of the EIS company. It is the date of entry in the register which HMRC will regard as being the date of issue of the EIS shares for deferral relief purposes. The mechanis of EIS can be simple and straightforward but not all companies give these matters the attention they demand.
Yours hopefully
Kevin Slevin, Slevin Associates
Author of E I S: A Guide for Practitioners (Sept 2009)