People often ask what EIS CGT Deferral Relief is. We broke down the key terms and concepts.
Capital Gains (a profit from the sale of property or an investment) is taxed at the below rates If you pay higher rate Income Tax in the Uk:
28% on your gains from residential property
20% on your gains from other chargeable assets
Through the UK's SEIS and EIS schemes, individual investors are able to defer their CGT bill by subscribing to EIS qualifying shares, even if they don't take the tax relief.
See the below example of how CGT Investment Deferral Relief works:
When can CGT Deferral Relief be claimed?
Gains that can be deferred are those made on the disposal of a chargeable asset not more than three years before, nor more than one year after, the EIS investment is made.
Deferral relief is not dependent on income tax relief, and can be claimed separately.
How does CGT Deferral Relief work?
Upon subscribing deferred Capital Gains to EIS shares, it will defer the requirement for tax relief to be paid until one of the following is true:
the EIS shares are sold or disposed of other than to a spouse.
the EIS shares are exchanged for non-qualifying shares.
the EIS shares cease to be eligible shares (e.g. conversion to deferred or preferred shares) within three years of issue or three years of commencement of trade, whichever is the later.
the investor becomes non-UK resident within three years of issue or three years of commencement of trade, whichever is the later, unless he or she is going to work full-time offshore for three years or less.
an EIS company ceases to qualify for any reason (e.g. starting a non-qualifying trade) in the three years following the issue of the shares, or in the three years from the commencement of trade, whichever is later.
the investor receives certain prohibited benefits in the period beginning one year before and ending three years after the issue of the shares or three years after the commencement of trade, whichever is the later. These can include directors’ remuneration, rents, loans or interest, which HMRC regards as excessive. Even a small amount of ‘excessive’ benefit can trigger the whole of the deferred gains although there are de minimis levels. Value can be repaid to the company if it has inadvertently been withdrawn.
Can you defer CGT indefinitely?
The deferred gains will not be taxed on death, or if the shares are transferred to a spouse (though in that case they are taxable on the spouse). Death washes out the deferred gain completely. The death of a life tenant, however, will lead to the crystallisation of a deferred gain when a trust has invested in an EIS company.