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No preference too small – EIS relief denied

In a recent Frist Tier Tribunal case the question of whether shares carried any ‘present or future preferential right to a company’s assets on its winding-up’ was considered. The legislation dictates that Enterprise Investment Scheme (EIS) relief is not available where a preferential right exists.  In this case the preferential element was very small or, as it referred to often in law, ‘de minimis’.  Counsel for the company argued that as a majority of the risk and reward in the company’s business was contained in these shares, they were just the sort of investment that parliament intended to be covered by EIS relief.  The tribunal disagreed and stated that the preferential right attaching to the shares could not be ignored just because it was small.  EIS relief was lost.

EIS relief is very valuable for income tax, capital gains tax and capital gains deferral.  The legislation is complex and becomes more complicated every year.  We have extensive experience of ensuring that the legal drafting of commercial documentation does not have a detrimental effect on the ability to claim tax relief on otherwise qualifying investments.  Investors and investee companies would be well advised to seek professional opinion on company documentation to ensure it is compliant with the legislation so as not to jeopardise what in many cases, is a significant amount of tax relief.

 

 

Date: 27th January, 2016
Author: Cathy Corns

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