Enterprise Investment Schemes (“EIS”) – shelter for capital gains
Many people are probably broadly familiar with the income tax relief available where a qualifying EIS investment is made, and tax relief is given equal to 30% of the amount subscribed by an individual for new qualifying shares (ie. a tax repayment of £3,000 arises on a £10,000 investment).
But fewer people are probably aware of the capital gains tax benefits which can also arise from an EIS investment, whereby not only are any gains on a sale of the EIS shares (once held for three years) free from capital gains tax, but the amount invested in the EIS shares can also be used to defer capital gains made on other assets, generally within a four year window beginning one year before the EIS share are issued, and ending three years after.
In simple terms the amount invested in EIS shares which qualifies for income tax relief is deducted from the chargeable gain on the asset disposed of. This CGT deferral is available against gains arising on any chargeable asset, and claims can be restricted, if needed, to avoid losing the CGT annual exemption, and to make best use of any capital losses available.
The “deferred gain” later becomes chargeable if a “chargeable event” occurs (usually on a sale of the EIS shares, but also if a person becomes non-resident in the UK, or the EIS company starts to carry on non-qualifying activities). However, a significant cash flow advantage may have been obtained from the deferral, for a number of years.
A claim to deferral relief can be made any time up to five years after 31 January following the tax year in which the EIS shares were issued, and the usual form EIS3 must be obtained from the EIS company, certifying that the conditions for EIS relief are fully satisfied.
The above is only the briefest of summaries, and covers none of the many pitfalls that can arise when making an EIS investment, or the many stringent rules and conditions to be satisfied for EIS income tax or CGT deferral relief to be due. Nor does it cover “SEIS” investments, where the rules are different.
So please do contact your Barnes Roffe advisor if you have made a chargeable gain with tax payable, and you are considering an investment in shares in a company which might qualify for EIS income tax relief. This is a complex area, where professional advice is an absolute must!
Blog written by Andrew Kent
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