EIS Deferral Relief Print

To obtain EIS deferral relief an individual must subscribe for shares in an unquoted trading company, which qualifies as an EIS company. However, unlike EIS income tax relief, the individual may be connected with the company at the time the shares are issued. This allows an existing director or employee to subscribe for shares in the company, and there is no restriction to the proportion of the company which the individual controls, either before, or after the issue of the new shares. In addition, the amount that may be subscribed, and qualify for EIS deferral relief, is not restricted to the income tax limit of £1,000,000. However there are restrictions on the amount of gross assets an EIS company may have both before and after the issue of new shares, and the amount that may be raised under EIS in any year is restricted to £5 million. (£10million for knowledge intensive companies.)

EIS deferral relief operates by “attaching” the reinvested gain to the new asset (the EIS shares subscribed for) until such time as the new asset is disposed of. At that time, the original gain crystallises.

Example

In December 2010 David sold a commercial property at a gain of £150,000. In June 2012 he invested £200,000 in a qualifying EIS company, and claimed both EIS income tax relief, and deferral relief. The EIS investment is sold in December 2021 at a profit. As this was a qualifying EIS investment it is exempt from CGT, but at that point the original held-over gain revives. David is a higher-rate taxpayer, and has no other gains in the year. His CGT liability for 2021/22 is calculated as follows:

£
Revived gain 150,000
Less Annual Exemption 12,300
Taxable Gain 137,700
Capital Gains Tax payable @ 20% 27,540

EIS deferral relief is available in respect of gains arising from the disposal of any asset, where the gain is reinvested in a qualifying investment. Broadly this means an investment in:

  • An unquoted company which exists wholly for carrying on one or more qualifying trades;
  • An unquoted company whose business consists entirely in the holding of shares in or other securities of, or the making of loans to one or more qualifying 90% subsidiaries of the company;
  • An unquoted company whose business consists entirely in the holding of such shares or securities, or the making of such loans, and the carrying on of one or more qualifying trades.

A qualifying trade is any trade conducted on a commercial basis with a view to making a profit, with the exception of:

  • Dealing in land, commodities or futures, or in shares, securities or other financial instruments;
  • Dealing in goods otherwise than in an ordinary trade of wholesale or retail distribution;
  • Banking, insurance, money lending, debt factoring, hire purchase financing or other financial activities;
  • Leasing, or letting or receiving royalties or licence fees;
  • Providing legal or accountancy services;
  • Property development;
  • Farming or market gardening;
  • Holding, managing, or occupying woodlands, and any other forestry activities, or timber production;
  • Shipbuilding;
  • Producing coal;
  • Producing steel;
  • Operating, or managing hotels or comparable establishments (including guest houses, hostels and other establishments whose main purpose is to offer overnight accommodation with, or without catering) or property used as such;
  • Operating, or managing nursing homes or residential care homes, or property used as such;
  • Generating or exporting electricity or making electricity generating capacity available;
  • Generating heat or subsidised production of gas or fuel;
  • Generating any form of energy not within the two immediately preceding categories;
  • Producing gas or fuel;
  • Providing services or facilities for any trade, profession, or vocation concerned with the above, and carried on by another person (other than a parent company), where one person has a controlling interest in both trades.

It is not necessary to reinvest the entire disposal proceeds, and relief may be claimed on whatever part of the gain is reinvested into qualifying shares. The amount of the gain not reinvested is assessed to CGT in the normal way.

The acquisition of the new asset must take place within the period commencing 1 year before, and ending 3 years after the disposal of the old asset.

The specific rules concerning the above are complicated, and professional advice should be sought if such an investment is required to shelter a gain.

Example:

Harry, a higher rate taxpayer bought a painting in July 2003 for £225,000. He sold it in May 2021 for £800,000. In November 2020 he invested £300,000 into a qualifying EIS company, and claims EIS deferral relief against the gain. He had no other chargeable gains in 2021/22. His CGT liability  is as follows:

£
Sale proceeds of painting 800,000
Deduct Cost in July 2003 225,000
Gross Gain 575,000
Less EIS deferral relief 300,000
Net chargeable gain 275,000
Less Annual exemption 12,300
Taxable Gain 262,700
Capital Gains Tax payable @ 20% 52,540

The deferred gain of £300,000 will revive in the year the EIS investment is disposed of, and CGT will be payable at the rate of CGT at that time. Accordingly, as the rate of CGT could be increased to help fund the financial deficit caused by the coronavirus pandemic, it may be more prudent to pay any CGT at the current rate rather than claim deferral relief and risk paying an increased rate when the EIS investment is disposed of.

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