EIS Capital Gains Tax deferral

An Investor with a taxable capital gain from the disposal of any asset can reinvest the chargeable gain in EIS qualifying shares and claim for the gain (and so the tax payable on that gain) to be deferred. The gain can be deferred until the shares are disposed of or qualifying conditions cease to be satisfied (although it may be possible to defer the gain again under certain circumstances).

To benefit from this deferral relief, the Investor must have been resident (or in certain circumstances ordinarily resident) in the UK both at the time when the chargeable gain on the disposal of the assets occurred and at the time of making the reinvestment.

The investment limits that apply to EIS income tax relief do not apply to deferral relief so relief can be applied to any amount invested in EIS-qualifying shares.

To qualify for Capital Gains Tax deferral relief, the EIS-qualifying investment must be made within either one year before, or three years after the date the gain to be deferred originally arose.

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Example of CGT Deferral relief

Mr Blogs is an additional rate taxpayer who makes a capital gain of £510,000 in December 2016 on the sale of a residential property. He has not used his annual capital gains exemption of £11,100 for the 2016/17 tax year so he only needs to claim deferral relief of £498,900 to reduce his capital gains for the year to nil and utilise his annual exemption.

In February 2016 he invests £498,900 in the MMC EIS Fund which will subscribe for shares in qualifying companies within 3 years of December 2016. Thus he will have reinvested £498,900 of his gain within three years of it arising in shares qualifying for EIS relief and will be able to claim to defer capital gains (for a capital gains tax saving of £139,692, being £498,900 @ 28%) for 2016/17 once he has the forms EIS3 for the investments made.

The deferred gain will become chargeable as shares in each of the investee companies are disposed of at the rate prevailing at the time of disposal. Although it may be possible to defer the gain again under certain circumstances.

N.B.  There is no claw back of the income tax relief or deferral relief on death.

 

Other tax reliefs available under the Enterprise Investment Scheme:

Income Tax relief

Tax-free Capital Gains

Inheritance Tax relief

Loss relief

 

Disclaimer

You should note that the favourable tax treatment outlined above may not continue in the future and that other taxes or costs may arise which are not paid through MMC or imposed by MMC. The information in this document has been drafted on the basis that each Investor is an additional rate taxpayer, the additional rate being and 45% for 2016/17. If you are in any doubt about your tax arrangements, you should contact a qualified tax adviser for appropriate tax advice.

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