Deferral of capital gains via reinvestment

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Deferral of capital gains via reinvestment
  • Why defer a gain?
  • Roll-over relief for business assets
  • Incorporation relief
  • EIS deferral relief
  • Social enterprise investment hold-over relief (up to 5 April 2019)
  • Shares exchanged for shares
  • Shares exchanged for QCBs

Why defer a gain?

An individual’s net taxable income and chargeable gains for the tax year influence the rate of tax payable on his capital gains. See the Introduction to capital gains tax guidance note.

Depending on the nature of the asset disposed of, this can result in the individual paying capital gains tax (CGT) at 20% or 28% in tax years where his taxable income and gains exceed the basic rate threshold (£37,500 for the 2019/20 tax year; £34,500 for the 2018/19 tax year) but only 10% or 18% on gains in years where his net income and gains are lower than that threshold. If a gain is covered by the annual exemption (£12,000 for the 2019/20 tax year; £11,700 for the 2018/19 tax year), no CGT is due.

To optimise his CGT position, a taxpayer can reinvest the proceeds from the sale of an asset into the purchase of a qualifying asset and elect for the gain to be rolled into those replacement assets.

When the replacement asset is subject to disposal, or possibly where the investment conditions are broken, the deferred gain falls back into charge to CGT. This may be some years after the original gain arose and in many cases, the timing of the gain falling into charge can be controlled by the individual.

The deferral of gains can be achieved by five different routes:

  • reinvesting in business assets (see ‘Roll-over relief for business assets’ below)
  • incorporation of a business (see ‘Incorporation relief’ below)
  • subscribing for enterprise investment scheme (EIS) shares (see ‘EIS deferral relief’ below)
  • subscribing for shares or acquiring debt in a qualifying social enterprises (see ‘Social enterprise investment hold-over relief’ below)
  • acquiring replacement shares (see ‘Shares exchanged for shares’

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