Capital gains tax EIS deferral relief
Tax relief for re-investment 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.
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 twelve months before or within three years after the gain accrued.
There is no limit on the amount of gain which may be deferred. 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 deferred gain will be eligible for entrepreneurs' relief when it comes back into charge. Where entrepreneurs' relief is available on the initial disposal, claiming the relief reduces the amount of gain deferred into the EIS shares.
The deferred gain will become chargeable when the shares are disposed of (other than by inter-spouse transfer), if the investor or spouse emigrates or the company ceases to qualify.
EIS deferral relief is also available to trustees.
Please consult us for advice on the other special rules which apply to this relief.