EIS guide

15 14 RISKS AND REWARDS RISKS AND REWARDS b) Let’s assume our client does in fact have their full CGT annual exempt amount available (£12,000 for 2019/20). Rather than claiming CGT deferral relief on the full amount of the gain reinvested, they could claim less, for example, if they wanted to use their CGT annual exempt amount to cover part of their gain. For example, they could invest £38,000 in EIS and claim £38,000 in CGT deferral relief, leaving £12,000 to be covered by their CGT annual exempt amount and no CGT would be immediately payable. Only UK resident individuals and trustees of a qualifying UK resident settlement can claim deferral relief. The qualifying settlement is where all beneficiaries are either individuals or charities. There is no restriction on connected individuals claiming EIS deferral relief as there is in relation to income tax. There is no upper limit on how much capital gain can be deferred: the £1 million (£2 million for investments into knowledge-intensive companies) limit only applies to the income tax relief and even if the investor is not intending to claim income tax relief at all, there is no limit. Similar to income tax relief, gifting the shares to a spouse or civil partner does not crystallise the deferred gain immediately; it only crystallises once the spouse or civil partner disposes of the shares (and the gain is assessable on the transferee). However, gifting the shares to a third party crystallises the deferred gain immediately. There are other events that crystallise the deferred gain. If the investor becomes non-resident in the UK (however, going abroad for full-time employment and returning within three years is allowed) or if the shares themselves cease to be EIS- qualifying shares for some reason (see the section on Rules for qualifying companies), the gain crystallises. Deferral relief cannot be claimed before a compliance certificate (known as an EIS3) is issued by HMRC and Reinvesting a portion of a capital gain into EIS completed and signed by the company and then given to an investor in order to enable them to claim the relief. This applies when requesting CGT and income tax relief. In practice, this can mean CGT has to be paid in the meantime and reclaimed later on. There is more detail on the process of claiming the relief in the ’Claiming the tax reliefs’ section which starts on page 34. There is no stipulation as to which gains have to be deferred: earlier gains do NOT have to be deferred first. Which gains to defer (if there is more than one to consider) is entirely the investor’s choice. £50,000 CAPITAL GAIN CGT liability - potentially offset via CGT annual exempt amount and/or any capital losses brought forward CGT deferral claim £25k INVESTMENT £25k KEPT Tax-free growth (disposal relief) Providing EIS-qualifying shares are held for at least three years (from the later of when the shares were issued, or when the company started trading) and the investor successfully claims income tax relief, if the shares are sold at a gain, the gain on the EIS-qualifying shares is exempt from CGT. If full income tax relief cannot be claimed (or is not claimed) because the investor’s income tax liability is reduced to nil, full Disposal Relief is available. If partial relief has been claimed or part of the relief has been withdrawn, then only partial Disposal Relief is available. As well as being restricted if, for example, there is ’value received’, the CGT exemption is restricted in circumstances where the original investment exceeded the maximum permitted for income tax relief (£1million or £2 million providing at least £1 million is invested into knowledge-intensive companies). For example, ignoring carry back, if an investor bought shares for £3 million, including £1 million in knowledge-intensive companies, disposal relief would be restricted to two-thirds of any gain arising on a disposal. Example (Disposal relief) A client invests £50,000 into EIS- qualifying shares and then sells the shares for £75,000 four years later (in 2019/20). Outside EIS, the investor could expect to incur a £2,600 CGT liability. (£75,000 - £50,000 = £25,000 gain. £25,000 - £12,000 CGT annual exempt amount (2019/20) = £13,000 gain. £13,000 x 20% CGT = £2,600.) However, in these circumstances, the gain on the EIS shares is tax-free. Loss relief Relief is available for EIS shares that are disposed of at any time at a loss (after taking into account income tax relief which is retained). The loss can be set against the investor’s capital gains or their income tax liability. Example 1 (Partial loss) If the client mentioned earlier invested £50,000 into EIS-qualifying shares and instead sold their shares for a £25,000 loss, they would be entitled to offset that loss against any other gains that year to minimise their CGT liability. However, they would not be entitled to offset the entire loss. If we assume that they claimed the full £15,000 income tax relief available on the initial purchase, their loss relief is limited to £10,000. (£25,000 loss - £15,000 income tax relief retained = £10,000 available to offset against capital gains or income.) The amount that can be offset is dependent on the applicable CGT or income tax rate.