Summary. Capital Gains Tax Deferral through EIS investments allows UK investors to indefinitely defer CGT on gains by investing in qualifying unquoted companies. Recent rule changes, however, affect eligibility for Entrepreneurs’ Relief, potentially complicating CGT rates and deferral strategies. Thomas Nock Martin provides expert advice on maximising these tax benefits.
Capital gains tax deferral allows a UK resident investor to defer capital gains tax (CGT) on a chargeable gain from the sale of any asset, or a gain previously deferred, by investing in new shares of a qualifying unquoted trading company.
However, recent changes to the rules may mean you don’t qualify for the special low entrepreneurs’ relief rate of tax. So what is the most tax efficient way to proceed?
What is Entrepreneurs’ relief?
Entrepreneurs’ relief (ER) reduces the rate of capital gains tax (CGT) on the sale of certain business assets from 20% to 10%. There is a lifetime limit of £10m applied to ER for individual investors. The Finance Bill 2018/19 contained draft legislation outlining changes that affect business owners and their management teams. These changes reduce the number of shareholders eligible for ER and add complexity to determining the validity of claims.
ER is available to:
Sole traders or partners can make an entrepreneurs’ relief claim when selling or giving away all or part of their business. It is also available to company directors and employees having shareholding of 5% or more.
CGT rates
When you sell an asset for more than it cost you the difference is taxable as a capital gain. The type of asset sold determines the tax rate and any applicable exemptions or reliefs. The standard rates of capital gains tax are 10% and 20%.
EIS investments
Reinvesting capital gains from the disposal of any asset in EIS companies can defer these gains, potentially achieving a tax rate equivalent to the 10% ER rate or lower.
With an EIS investment, for every £1 you invest, you can defer indefinitely the CGT payable on every £1 of gain you make from the sale of your shares – this is known as capital gains tax deferral relief. The deferred gain becomes chargeable when disposing of the shares (except in inter-spouse transfers), if the investor or spouse emigrates, or if the company ceases to qualify. An EIS investment also qualifies for income tax relief which reduces your liability by 30% of the amount you invest.
Generally, investors can benefit from both the deferral of gains reinvested under EIS and from ER on those same deferred gains when they become chargeable again.
Spouse transfer
As mentioned above, shares can be transferred to a spouse. This gives you the possibility of reducing your tax bill to almost nothing by taking advantage of both annual CGT exemptions.
Maximising capital gains tax deferral relief
Aside from delaying when you have to pay CGT, deferral relief also gives you the option to spread your EIS investment over multiple years. This means you can use your annual CGT exemption and reduce your tax. For more information on tax when selling shares call us today on 01384 261300. Thomas Nock Martin offers expert tax advice for small business. So, don’t waste any more time searching “chartered accountants near me” or “chartered accountants in Birmingham” because we can help reduce your tax bill today.
If you have found this blog helpful, you may wish to read our previous blog on Self Assessment Tax Returns.
