You have just made a capital gain from selling an asset and intend to invest in an enterprise investment scheme (EIS) to defer paying tax on it. How can you achieve the best tax saving possible?

EIS relief

Buying shares in enterprise investment scheme (EIS) companies entitles you to the following tax breaks:

  • income tax relief equal to 30% of the amount you invest
  • tax-free growth in value. This is known as disposal relief and it means that where you sell the EIS shares for more than you paid for them the increase in value is exempt from CGT
  • CGT deferral relief. This works by allowing you to defer CGT on a capital gain you make in the period starting a year before you invest in an EIS and the three years following.

Example – deferral relief. In 2013/14 David sold an asset and made a capital gain of £50,000. Because he’s a higher rate taxpayer he faces a CGT bill on the gain of £10,948 (£50,000 – annual exemption £10,900 = £39,100 x 28%) payable on 31 January 2015. However, in September 2014 David invested £60,000 in a portfolio of shares in EIS companies. He claimed deferral on the full £50,000 gain. As a result it becomes chargeable to CGT only when David sells his EIS shares.

Example – deferred gain chargeable. In 2020 David sells his EIS shares for £75,000. The amount of capital gain chargeable will be:

Sale proceeds £75,000
Less cost of EIS shares £60,000
Gain £15,000
Add deferred gain now chargeable £50,000
Total gain £65,000
Less EIS disposal relief £15,000
Less annual exemption in 2020, say £12,000
Net gain taxable £38,000

Tax-efficient claim

What David didn’t realise when he made his deferral relief claim is that HMRC allows you to tailor it to maximise tax efficiency. Instead of deferring the whole £50,000 for 2013/14 he could have deferred just £39,100. That would have left £10,900 taxable, but his annual CGT exemption for 2013/14 (£10,900) would have covered the gain meaning no tax payable. The knock-on effect is that there would have been less gain to account for when he sold his EIS shares.

Sale proceeds £75,000
Less cost of EIS shares £60,000
Gain £15,000
Add deferred gain now chargeable £39,100
Total gain £54,100
Less EIS disposal relief £15,000
Less annual exemption in 2020, say £12,000
Net gain taxable £27,100

Further tax savings

So the lesson is to limit your claim for deferral relief to cover only the amount of your taxable capital gain and not all of it. However, there’s potentially more that can be done to save tax.

Tip. A transfer of EIS shares between spouses doesn’t cause a deferred gain to become taxable. That only happens when the spouse sells the shares. If David was married, giving some of his EIS shares to his wife shortly before the sale would cause part of the deferred gain to be taxed on her. However, her annual exemption will reduce the taxable amount. In our example that would cut the total taxable gain to just £15,100 (£27,100 less his wife’s annual exemption of £12,000).

Work out the taxable gain, i.e. the amount after knocking off your annual exemption etc. and limit your deferral claim to this. It’s only the deferred gain that’s taxable when you sell the EIS shares. Plus, if your spouse has CGT annual exemption to spare, use it by transferring some of the EIS shares to them before they’re sold.

Shares

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