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Capital gains tax EIS deferral relief
Tax relief for reinvestment of gains in qualifying schemes is intended to stimulate investment in small businesses, and is incorporated into the enterprise investment scheme (EIS), as EIS deferral relief. This provides a ready supply of venture capital to growing businesses.
Deferral relief allows a UK resident investor to defer capital gains tax (CGT) on a chargeable gain arising from the disposal of any asset, or a gain previously deferred, by investing in new shares of a qualifying unquoted trading company.
The relevant definitions are set out in the EIS legislation. Most trades qualify, but there are a number of exceptions including but not limited to, banking, insurance and other financial activities, and those considered to be 'asset backed' (such as farming, forestry, property development, hotels and nursing homes).
Shares on the Unlisted Securities Market (USM) are regarded as quoted for this purpose, but those on the Alternative Investment Market (AIM) are not.
The investor must subscribe for qualifying shares within 12 months before or within three years after the gain accrued.
There is no limit on the amount of gain which may be deferred, other than the level of the EIS investment itself. In addition, an investor can obtain EIS CGT deferral relief even if they are ‘connected' with the company (broadly own over 30% of share capital).
This provides a real opportunity for shareholders in owner managed businesses that dispose of an asset and subsequently wish to reinvest some of the funds into an existing or new ‘qualifying' trading company.
The original gain may be deferred (by way of an election), postponing the payment of tax on the first disposal until a later disposal of the new shares (other than a disposal by inter-spouse transfer).
If the original disposal qualified for entrepreneurs' relief, this may still be available on the later disposal. This deferral may provide a cash flow benefit, but it should be noted the gain will be subject to tax at the rate in force at the time of the later disposal, which may be more or less than the current rate.
The deferred gain will become chargeable before the disposal of the EIS shares if the investor emigrates or the company ceases to qualify.
EIS deferral relief is also available to trustees.