This week we look at a valuable capital gains tax (CGT) relief which enables a gain on the sale of any asset to be deferred by reinvesting the gain into qualifying Enterprise Investment Scheme (EIS) shares.
Assuming various conditions are met, the deferred gain only comes into charge on the occurrence of certain future events (see below).
There is also a valuable income tax relief associated with qualifying EIS investments as well as a CGT disposal relief which exempts the whole gain on the EIS shares themselves if the relevant conditions are met.
However, our focus this week is on the reinvestment relief specifically.
This relief has a flexibility in that the individual does not need to qualify for EIS income tax relief to qualify.
The investor must subscribe for new EIS shares wholly in cash and the following conditions must also be met:
- The EIS shares must be acquired in the time period from 12 months before the asset disposed of giving rise to the gain being deferred and 36 months following.
- The investor must be UK resident both at the date of disposal of the asset giving rise to the gain being deferred and at the time the EIS shares are acquired.
There is a strict procedure that a company must adhere to in order to be granted permission by HMRC to issue certificates to its investors allowing EIS relief to be obtained and specialist advice is essential in this area.
A useful flexibility EIS reinvestment relief has is that it is not an ‘all or nothing’ relief.
For instance, if an individual makes a gain, part of which can be reduced by capital losses and/or the annual capital gains tax exemption (currently £12,300), they can restrict the amount of the gain they are deferring to just the amount which would otherwise fall into charge.
This way, it is possible to minimise the size of the amount which will ultimately come into charge in the future when the deferred gain crystallises.
The claim for EIS reinvestment relief must be made within five years from the 31 January following the tax year during which the EIS shares were issued.
The claim can be made either on the self-assessment tax return or on a standalone basis.
As this is a deferral relief rather than an exemption, the gain reinvested comes back into charge at a future point.
The main triggers for the gain to come into charge are:
- The EIS shares are gifted (unless to the individual’s spouse/civil partner)
- The EIS shares are sold
- The investor becomes non-resident within three years of the shares being issued.
- The shares cease to be eligible shares
EIS reinvestment relief is a valuable tax relief which can be particularly powerful if combined with the associated EIS income tax and EIS disposal relief which will be the subjects of future Tax Tuesdays.
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