John is a new client who has recently given me his portfolio of assets to review. He has also given me copies of the tax returns which he has filed for the past few years so I can see where his income comes from. He has not really used a financial adviser in the past and does most of his own tax returns but he is getting to the age where he wishes to simplify things and ensure he is using his assets correctly.
On looking closer at John’s investments and tax affairs, I noticed that he invested 20,000 in a company through an enterprise investment scheme a few years ago and did not make a claim for income tax relief. He told me he had forgotten about the tax relief but also said the company had gone bust in the last year and he was concerned about the loss as he had no capital gains.
I suggested that he write to his inspector of taxes with an EIS3 certificate and make a claim for the EIS relief that he overlooked by reopening his tax return for that year. EIS relief is generally only available against tax arising in the year of investment – although you can carry back some relief in certain circumstances – but it was likely that the Revenue would accept a late claim.
Of greater importance was to make a claim for his capital loss by setting the loss suffered on the failure of the company against his income tax for the year.
This relief against total income for the year is available under certain circumstances, which is useful for John who does not have capital gains against which to set the loss. The loss has to be incurred in the case of newly issued shares that the investor has obtained by subscription. Fortunately for John, this is the case with the EIS shares because EIS relief is available only on such newly issued shares. Also:
It must have been a trading company although certain types of business are excluded.
The business must have been carried on wholly or mainly in the UK.
Shares must have been unquoted when they were issued although they could have become quoted at a later date.
John had received notification from the liquidators confirming the date of winding up and that there were no distributions to be made, so the whole amount that he invested was a loss. But – and this is where it became apparent that no claim had been made for the EIS relief in the first place – it is important to take into account the tax relief that has already been deducted.
Having invested 20,000, this whole amount could have been claimed as a loss against income. However, John was claiming 4,000 in EIS relief at 20 per cent, so would only be able to claim a loss of 16,000. It would be possible simply to forgo the EIS relief and claim the whole lot in one go but it looks like there may some fine-tuning involved to maximise the relief’s benefits.
There is then the question of timing. John can claim to have the loss deducted from his income in 2005/06 – the year in which the loss arose. He could also claim to have it set against 2004/05 but cannot apportion the loss between the years. If he elects a particular year, the whole loss will go into that year, even if it means losing his personal allowance. If there is any loss left over, though, it can be carried over to the second year.
In John’s case, the last year was one in which he had quite a large amount of income subject to higher-rate tax, so the whole loss can go against that year.
No pension contribution can be made in that year because it will compromise his tax relief.
The claim has to be made within two years of January 31 in which the loss was made.
John is not the first person to have forgotten to use his tax relief but he was quite surprised to get more income tax relief on the loss of his investment.
Mark Bolland is a director at Chamberlain de Broe