The Enterprise Investment Scheme (EIS) offers investors a host of tax advantages, as an incentive for taking on the risks associated with investing in small companies. Income Tax relief of 30% of the amount invested often grabs the headlines, but EIS investments can also be used to mitigate Capital Gains Tax (CGT). Gains resulting from the sale of other assets can be deferred through an investment into EIS-qualifying companies.
This case study illustrates the impact of CGT deferral.
Selling a buy-to-let property
Until recently, Ms Evans owned two buy-to-let flats located in a development near her home in Bristol. To reduce the proportion of wealth invested in property, she has now sold one of the flats for £250,000, bringing her a gain of £50,000.
She is now planning to make an EIS investment to defer the CGT on the gain. Here are the key things she will need to remember:
Invest the gain to access the rest of the capital
To defer CGT, only the value of the gain needs to be invested into EIS shares. In Ms Evans’s case, by investing £50,000 into an EIS investment she can defer payment of the full £14,000* CGT bill relating to the property sale. The remaining £200,000 of sale proceeds from the property can be used for other purposes.
Part or all of the gain can be deferred
There is no requirement to defer the gain in full. If Ms Evans was uncomfortable investing the full amount of the gain, she could opt to invest a smaller amount into EIS and defer part of the CGT from her property sale.
It’s not just gains from the current tax year that can be deferred
CGT deferral can be applied to gains that occurred up to three years before the date that EIS shares are purchased. CGT on gains which occur up to 12 months after the EIS share purchase date can also be deferred. However, CGT deferrals and other EIS tax reliefs are only available once the investor has received an EIS3 certificate from HMRC. As such, it’s possible that Ms. Evans may need to pay CGT and then claim it back once she has received her EIS3 certificate.
EIS Income Tax Relief enhances the value of the proceeds
As well as deferring CGT, Ms. Evans will be entitled to claim Income Tax Relief equal to £15,000: 30% of the amount invested into EIS shares. Coupled with the deferral of CGT, this effectively boosts the value of her sale proceeds to £265,000 – nearly £30,000 more than she would have been left with if she had not made the EIS investment, as shown in the graph below.
Gains can be deferred indefinitely
CGT deferred through an EIS investment will remain deferred until the investment is sold (or ceases to be EIS-qualifying for any other reason). But at that point, the gain can be deferred again by making a further EIS investment (assuming a suitable investment is available). Ms Evans may also be able to reduce the size of the EIS investment needed to defer the gain, by using her annual CGT exemption for the year in which the gain revived.
If an investor dies, a deferred gain does not come back into charge
If an investor has deferred CGT through an EIS investment and dies whilst still holding the investment, the Capital Gain effectively expires – the beneficiaries will not be liable for the CGT, even when the EIS investment is eventually sold.
*Assumes annual CGT personal allowance has already been used in full and CGT is payable at 28%.
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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.
Tax treatment is dependent on individual circumstances and may be subject to change in the future. Investors in the Oxford Capital can, subject to their own individual circumstances, obtain tax reliefs under the Enterprise Investment Scheme (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”).