What does it mean if my EIS investment company goes under?

Early stage businesses who have raised finance under the EIS scheme may fall victim to the difficult market conditions. EIS relief requires a business to meet certain relevant conditions throughout a 3 year period from the date of investment, so what does it mean for investors who claimed tax relief on their investments if a business goes into liquidation in this timeframe.

Income Tax - Relief Withdrawal:

• If the EIS company goes into liquidation within (generally) three years of the share issue, Income Tax relief originally given is clawed back.  The amount clawed back is 30% of any value received on liquidation (up to a maximum of the relief originally given).
• However, if the value received on liquidation is considered insignificant or no value is received at all, no Income Tax relief is withdrawn.
   

Capital Gains Tax Deferral – Relief Withdrawal:

• If an EIS investment was used to defer a capital gain, this gain will become chargeable on the liquidation.
   

Use of Losses:

• If the liquidation proceeds are less than the original investment a loss arises. This loss is reduced by any Income Tax relief not withdrawn.
• The loss can be set against income in the year of the disposal or the preceding year.  
• Alternatively, the loss can be set against capital gains made in the year of the loss, or carried forward to be set against future capital gains arising.