Gain deferred through EIS becomes chargeable

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

Gain deferred through EIS becomes chargeable
Introduction
Chargeable events
Assessment of deferred gain
Interaction with entrepreneurs’ relief
Company reorganisations and reconstructions
Acquisition of EIS company by a new company

The enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies with a permanent establishment in the UK.

A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. He can benefit from the following tax reliefs:

•income tax relief for the investor of up to 30% of the amount invested (see the Enterprise investment scheme income tax relief guidance note)
•disposals of EIS shares after three years may be free from CGT (see the EIS and VCT shares guidance note (subscription sensitive))
•capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares (see the Enterprise investment scheme re-investment relief guidance note)
•losses on EIS shares may be offset against taxable income (see the Losses on shares set against income guidance note)
•EIS investments should qualify for IHT business property relief after two years’ ownership (see the BPR guidance note (subscription sensitive))

This guidance note discusses the triggers that cause the capital gain deferred on the subscription for EIS shares to crystallise.

Introduction

Under EIS deferral relief (also known as EIS re-investment relief), deferred gains are set aside or ‘frozen’ until the occurrence of specified future events.

TCGA 1992, Sch 5B, para 2

Note that EIS deferral relief does not work in the same way as roll-over relief because the base cost of the replacement asset, ie the new EIS shares, remains the same.

This frozen gain crystallises and becomes chargeable in the year of a ‘chargeable event’. Usually, this will be on the sale of the EIS shares. When the EIS shares are sold there will sometimes be a gain on the shares