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Have your EIS cake and eat it with ER

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9th Mar 2015
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Alongside the clamp-down on claiming ER for goodwill gains arising on incorporation, there was second amendment to the operation of entrepreneurs’ relief  (ER) which also came into effect on 3 December 2014.

This change to the circumstances in which ER can be claimed does not provide an immediate tax advantage.

But in the longer term, it may prove to be very useful for taxpayers who want to shelter gains made from selling their business towards the end of their business career.

Until 3 December 2014, a capital gain which is subject to an ER claim could not also be deferred, as it had already been taxed in full. Thus on the sale of a business, or of shares in a personal company, the taxpayer had to choose whether to claim ER and pay tax on the net gain at 10%, or defer the taxation of that gain.

A gain can be deferred by investing in shares issued under the Enterprise Investment Scheme (EIS), or shares or debt issued under the new Social Investment Tax Relief (SITR).

An investment under Seed Enterprise Investment Scheme (SEIS) in 2013/14 or later years provides an exemption for 50% of the reinvested gain, it does not defer the gain. An investment under SEIS in 2012/13 provided a 100% exemption from CGT for the amount of gain reinvested.

The gain deferred using EIS or SITR falls back into charge to CGT when the EIS or SITR investment is disposed of, or when the investment conditions are broken. At that stage it is normally too late to claim ER, and anyway a claim for ER would mean 10% CGT becomes payable retrospectively based on the date of the original gain arose.

The radical change effective from 3 December 2014 is that the individual can choose to defer (using EIS or SITR) an ER-qualifying gain, and then claim ER when that deferral mechanism comes to an end.

This allows the taxpayer to get the best of both tax reliefs: Defer the gain for a period that suits the taxpayer, then take advantage of the 10% rate of CGT by claiming ER when the deferred gain falls back into charge.

A gain that arose up to three years ago can be deferred by investing under the EIS or SITR, as it is still within time to make the deferral relief claim. If ER has already been claimed for a gain made in 2013/14, that ER claim can be withdrawn until 31 January 2016, to allow a deferral of the full gain to be made.   

It is not necessary to retain the EIS or SITR investments for three years to achieve deferral of the gain. The CGT deferral occurs as long as the investment conditions have been met.

The EIS/SITR investments can be disposed of gradually in each subsequent tax year to bring a proportion of the original gain back into charge for CGT. At that disposal the annual exemption for the tax year is deducted before the ER rate of 10% is applied to the remaining gain.

If income tax relief is also required on the EIS / SITR investment then the investment must be retained for at least three years. This three year holding period will also shelter any gains arising on the EIS/ SITR shares themselves from CGT.

Rebecca Cave FCA CTA is the joint author of Capital Gains Tax Reliefs for SMEs and Entrepreneurs 2014/15 published by Bloomsbury Professional.

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By User deleted
09th Mar 2015 14:28

Eat and have is not possible ...

Have and eat is easy - wrong way round

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By chatman
11th Mar 2015 12:06

Eat and have are possible; just not in that order.

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