UK Capital gains tax

UK Capital gains tax

Tax deferral

In addition, or as an alternative to claiming the initial relief, investors may defer assessment to capital gains tax on other gains by reinvesting those gains in subscriptions for new ordinary shares in qualifying companies.

  • Reinvestment of other capital gains must be made up to one year before and three years after the disposal which gave rise to the gain.
  • The period of deferral is until the investment is disposed of or the investee company ceases to qualify.
  • There is no limit (up to the amount of the capital gain) that can be deferred in this way.
  • The gain to be reinvested is that before deduction of taper relief.

An investor may therefore benefit not only from the 20 per cent initial tax relief and the other reliefs as above (for investments up to £200,000), but also by deferral of assessment to capital gains tax (40 per cent for a higher rate taxpayer) on the gain which is reinvested.

Accordingly, it is possible for investors to claim initial tax relief of 60 per cent (for a higher rate taxpayer) on the first £200,000 (re)invested. However 40 per cent is a deferral only and is repayable when the investment is disposed of or the investee company ceases to qualify.

Who can benefit from EIS investment?
Most individual investors, subject to their personal circumstances, should be eligible. Their qualifying status must continue for three years following subscription in new ordinary shares.
However for initial relief and CGT exemption, an individual:
? need not be UK resident (but must be a UK taxpayer)
? must not be connected with the company as:

? an employee
? an existing paid director (but may be a paid director once the issue has been made)
? a shareholder (with associates) with more than 30 per cent of the share capital, share and loan
capital, voting power or rights to more than 30 per cent of the assets on a winding up
? otherwise able to control the company

? may be a new director (but specialist advice should be sought)
? or his or her spouse can each invest up to £200,000 per annum.
For deferral relief, an investor:

? must reinvest a chargeable gain in the period one year before and up to three years after
it arises
? must be UK resident or ordinarily resident in the UK at the time of the original gain, its
reinvestment and for three years thereafter
? can be connected, ie control the company or be an employee or director
? can reinvest an unlimited amount (up to the amount of the gain(s) deferred).

Relationship between EIS deferral and taper relief
Where a gain which would attract taper relief is deferred, there is no loss of taper relief up to the time of the disposal. However, no further taper relief accrues after that date. The amount of taper relief is effectively frozen at the date of the disposal. Please refer to the example on page eight.

The level of reinvestment required to defer a gain is the gross amount of the gain before taper relief is taken into account.

‘Serial’ investors
Where the asset giving rise to the gain was itself a qualifying EIS investment and made on or after 6 April 1998 and the gain on disposal of that asset is reinvested into a second EIS investment then the period of the taper relief is extended for the entire periods of ownership of the original and new shares (up to the maximum allowed) but ignoring any periods between the disposal of the original shares and the acquisition of the new shares where no asset is owned. This potential maximisation of taper relief encourages serial reinvestment into qualifying companies.