EIS guide

13 12 RISKS AND REWARDS RISKS AND REWARDS the shares were acquired from a spouse or civil partner, the assessment is made on the person they were transferred to as if they purchased them on the date of acquisition by the transferor. BRAND NEW SHARES Finally, to qualify for income tax relief the client must subscribe, fully pay for in advance and be issued brand new shares that the investee company is issuing to the market. Secondary purchases, either purchased on an exchange or arranged privately, do not qualify for EIS tax relief. CLAWBACKS Transferring the shares to a spouse or civil partner within the three-year period does not trigger a clawback of income tax relief, but transferring the shares to any other third party does. (This may be driven by the investment manager for a commercial reason and be out of an investor’s hands). There is no clawback if the disposal or transfer is a result of the investor’s death. HMRC claws back income tax relief by raising a special assessment for the tax year in which the relief was obtained. Normally, interest is charged from 31 January following the end of the tax year for which the assessment is made. Where CGT DEFERRAL WINDOW EIS deferral qualification period for a realised gain on disposal of an asset 1 year prior 0 1 year 3 years after 2 years Asset disposal and realised again Period during which EIS shares must be issued against the realised gain from the asset disopsal in order to claim deferral relief Reinvestment relief (deferral relief) If a client reinvests a capital gain from the sale of another asset into qualifying shares in an EIS company, they are entitled to defer the gain on the original asset. This means that any CGT liability on that gain is deferred. The gain is deferred until the investor sells their shares (or is deemed to have disposed of their shares) in the EIS company, at which point the gain crystallises and CGT is then payable at the prevailing rate applied at that time. EIS cannot be used to reduce, for example, the rate of CGT applying on the sale of property (currently 28% for a higher rate taxpayer). A revived gain is chargeable to tax at the rate applying to the original asset. If the proceeds from the sale of the EIS shares are reinvested in another EIS-qualifying company, the gain can be deferred again if reinvested during the relevant time window. This can continue indefinitely and, if the investor were to die holding an EIS investment that had enabled them to defer gains in this manner, then the CGT liability is extinguished. In order for the gains to be matched to an EIS investment, they must arise within a four-year time window commencing three years before and ending one year after the share issue date. Example A client sells a residential property (that was not their main residence) for £300,000, making a capital gain of £50,000. By investing that £50,000 into EIS-qualifying shares, the CGT on the gain is deferred until the client disposes of the EIS-qualifying shares. This has the effect of deferring the CGT liability of £14,000 (£50,000 x 28%), assuming the client has no remaining CGT annual exempt amount that year and pays CGT at the higher rate for property disposals. If the client had sold their property 30 months ago, they still have six months in which to invest their gain into EIS-qualifying shares and defer the CGT on the gain. The same timeframe applies to each subsequent reinvestment in EIS shares. Only the capital gain (or a proportion of it) needs to be invested in an EIS, NOT the entire proceeds of the sale. This feature can be useful in scenarios where advisers want to ensure that conventional CGT annual exempt amounts are maximised. Example a) Our client could choose to invest just £25,000 from the sale of their house into EIS- qualifying shares. Deferring £25,000 would leave them a CGT liability of £7,000 (£25,000 x 28%), assuming the client has no remaining CGT annual exempt amount that year and pays CGT at the higher rate for property disposals. HMRC Guidance HS297 Enterprise Investment Scheme and Capital Gains Tax Who can claim deferral relief? You can claim relief if you are an individual resident or ordinarily resident in the United Kingdom (UK). You cannot claim relief if you are treated by double taxation arrangements as resident elsewhere, so that (ignoring any Disposal Relief) you would not be liable to UK Capital Gains Tax on any gain from the EIS shares. The trustees of certain settlements may also claim relief.