Gain deferred through EIS becomes chargeable

Produced by Tolley
Gain deferred through EIS becomes chargeable

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

  • Gain deferred through EIS becomes chargeable
  • Chargeable events
  • Assessment of deferred gain
  • Interaction with entrepreneurs’ relief
  • Original gain arose before 6 April 2008
  • Original gain arose between 6 April 2008 and 22 June 2010
  • Original gain arose between 23 June 2010 and 3 December 2014
  • Original gain arose on or after 4 December 2014
  • 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.

A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. For a summary of the tax reliefs that are available to the investor, see the Enterprise investment scheme tax relief guidance note.

CGT deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares. This is discussed in detail in the Enterprise investment scheme deferral relief guidance note.

Under EIS deferral relief, deferred gains are set aside or ‘frozen’ until the occurrence of specified future events. The base cost of the replacement asset (ie the new EIS shares) remains unchanged.

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 themselves but, in addition, this disposal will also crystallise the frozen gain.

Any profit on the disposal of the EIS shares themselves is likely to be exempt from capital gains tax under the rules discussed in the Venture capital scheme shares guidance note.

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

Chargeable events

The following are chargeable events:

  1. gift of the EIS shares, unless the gift is to the individual’s spouse or civil partner

  2. disposal of the EIS shares by the taxpayer or his spouse / civil partner where the shares have previously transferred on a no-gain / no-loss basis

  3. investor becoming non-UK resident within three years of the issue of the shares (or his spouse / civil partner becomes non-resident within that period where the shares were previously transferred on a no-gain / no-loss basis), unless that person goes abroad on a full-time employment contract and returns to the UK within three years

  4. the EIS shares cease

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