Many investors in listed stocks and shares have already felt the pain of the coronavirus crisis but for those who have invested into unlisted companies, the worst may yet be still to come as the value of their shares could become worthless if the business fails.
Historically, investments in unlisted companies have been the preserve of large institutions and wealthy business angels. However, the rise in crowdfunding has made investing into shares of unlisted companies easier and more popular than ever.
According to recent research by the Cambridge Centre for Alternative Finance, the UK is second only to the US in the amounts invested in shares through crowdfunding with just under $485m invested in 2018.
For crowdfunding shareholders, this is likely to be the first economic crisis they have faced with this type of investment so many will be unfamiliar with the consequences of insolvency.
Most investments made through crowdfunding platforms will have qualified for tax relief under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) which encourage investment into unlisted UK companies. It’s clearly working as HMRC statistics show that companies raised nearly £950m of investment under these schemes in the 2017/18 tax year.
EIS and SEIS are best known for providing income tax relief to individuals around the time the investment is made. They can, however, also provide valuable tax relief should losses be suffered on the investment made and any tax relief needs to be claimed.
A difficulty with unlisted shares is that they can be difficult to sell, and investors could be stuck with worthless shares until an insolvency process has completed. HMRC recognise this issue and if the shares are of ‘negligible value’, a claim for tax relief for the loss of value can be made even though the shares have not yet been sold.
Typically, HMRC will accept that a negligible value claim is valid when the company starts an insolvency process, but it can be made at any time when the shares have become ‘worth next to nothing’.
Once claimed, the loss can be treated as having arisen at any time in the previous two years and for EIS and SEIS investments in particular, there is flexibility in claiming the losses against income or capital gains.
The rules are complex though and there may well be restrictions on the amount of loss that can be set against income so advice should be sought to ensure any tax relief is maximised. Ultimately it is hoped that the Chancellor’s measures will give businesses the wriggle room needed so no such tax relief is needed.