EIS, or Enterprise Investment Scheme, is a very popular government scheme which makes it easier for businesses to raise money. In short, this scheme offers tax reliefs to investors who subscribe to newly issued shares in a company. One of these tax reliefs is EIS deferral relief, which is particularly desirable for investors who own valuable assets. To learn more about EIS, you can read our guide on how to use EIS to raise money for your business.
WHO BENEFITS FROM EIS DEFERRAL RELIEF
EIS deferral relief can benefit those who are liable for Capital Gains Tax. Capital Gains Tax (CGT) is a tax on the profit when you sell or give away an asset that has increased in value. For example, if you buy an asset for £10,000, and sell it for £25,000, you will have made £15,000 in profit. You will be liable to pay taxes on this profit.
With Capital Gains, you have an annual tax-free allowance, which is £12,300 for the tax year 20/21. This means that you can make a profit of up to £12,300 before having to pay any Capital Gains Tax.
Using our example above, if you make £15,000 in profit by selling an asset, you will normally only have to pay 20% tax on the amount that exceeds your allowance, which in this situation is £2,700 (£15,000 – £12,300). Selling this asset would therefore cost you £540.
You normally have to pay capital gains tax in the same year as you dispose of the asset. However, with EIS deferral relief you can defer the gain, and therefore also the tax bill, to a later date if you use your gain to buy shares in an EIS eligible company.
In principle, this means that you can sell any asset that you own, use the profits to buy shares in an EIS eligible company, and defer the tax bill of the asset sale for a later tax year. This would normally crystalise when you sell the EIS shares at a later date after hopefully having made an even larger profit. To be able to defer the entire gain, your EIS investment must be at least equal to the chargeable gain.
Let’s look at another example. Imagine that you have just sold a valuable asset, say a residential property.
After your capital gains allowance, you have made a profit of £50,000, which means that you owe HMRC £10,000 in capital gains tax.
With EIS deferral relief, you could instead invest the full amount of £50,000 by subscribing to new shares in a new EIS eligible venture. A few years later your shares may have increased in value. Imagine you sell your shares for £100,000 – giving you a profit of £50,000. You now have to pay back the capital gains tax that you owed from the residential property sale, £10,000, but you are £40,000 better off than you were originally.
You may or may not have some tax to pay on the profit made from the sale of the shares too however, this example is simply to demonstrate how EIS deferral relief works.
If you would like to explore EIS deferral relief, I encourage you to discuss this with your accountant, as they are better suited to evaluate your situation. We are always happy to advise our clients on any tax saving alternatives.