EIS provides a number of valuable opportunities for planning efficiency around the deferral of capital gains. Just to recap the rules are as follows:
- Capital gains realised on different assets can be deferred by investing into EIS qualifying shares during the period one year before or three years after selling or disposing of the assets.
- To qualify, the investor must be an individual who is resident in the UK both at the time the gain accrued and at the time the shares are issued. (CGT disposal relief is available to certain trusts).
- Unlike claiming CGT disposal relief on gains generated by an EIS investee company, it’s not necessary to claim EIS income tax relief to obtain deferral relief.
- The amount of the gains that may be deferred is limited only by the amount subscribed for eligible shares in an EIS qualifying company.
- Once the shares in the EIS Company have been sold, the deferred gain will fall back into charge in the tax year of disposal. If the shares against which the gains are deferred are held until death, the deferred gain is washed out.
SPREADING THE BENEFITS OF CGT DEFERRAL
The nature of an EIS portfolio means that exits from investee companies are likely to take place on a staggered basis. Building a well-managed and well-diversified EIS portfolio means that this happens over a period of time – perhaps 12 to 18 months – as suitable investments are identified. These companies will then typically be held in the client’s portfolio for between 5-7 years, depending on the pace of progress.
Consequently, any deferred gains may well crystallise over multiple tax years as each company exits. This allows what may have been a significant gain to be mitigated by multiple annual CGT exemptions and, in doing so, reduce the overall liability.
RE-ALLOCATION OF GAINS BETWEEN SPOUSE / CIVIL PARTNER
Unlike other transfers, it is possible to transfer gains between spouses or civil partners (which is covered by the no gain/no loss rule) within EIS without crystallising CGT.
This means that, if a wife invests in an EIS to defer a gain, giving some of her EIS shares to her husband before the sale would result in part of the deferred gain being taxed on him. However, his annual exemption could reduce the taxable amount. This would reduce the total taxable gain as it allows the annual CGT exemptions of both spouses to be used to mitigate the gain.
So, it’s clearly worth investigating EIS for the solutions it can provide, with CGT deferral being a useful option.
For more information about EIS tax planning and investing, click here.
Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change.