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This publication is available at https://www.gov.uk/government/publications/enterprise-investment-scheme-and-capital-gains-tax-hs297-self-assessment-helpsheet/hs297-enterprise-investment-scheme-and-capital-gains-tax-2017
This helpsheet explains capital gains aspects of the Enterprise Investment Scheme (EIS) for investors. But it is only an introduction. If you are in any doubt about your circumstances you should ask your tax adviser.
HM Revenue and Customs (HMRC) will be pleased to help and will provide any forms you may require. You can also consult the Venture Capital Schemes Manual, which explains the rules in more detail.
This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return.
You can find more information about the Enterprise Investment Scheme and Capital Gains Tax in the Enterprise Investment Scheme - introduction.
Helpsheet 284 Shares and Capital Gains Tax and Helpsheet 286 Negligible value claims and Income Tax losses on disposals of shares you have subscribed for in qualifying trading companies, may also be of use to you.
There are 2 Capital Gains Tax Reliefs within the EIS:
- Disposal Relief, where shares in an EIS company are disposed of and certain criteria are met
- Deferral Relief, where a gain arising on a disposal of any asset is deferred against a qualifying investment in shares issued by a company that meets specified requirements
What is Disposal Relief
If Disposal Relief is due you won’t have to pay Capital Gains Tax on a gain on your disposal of the EIS shares. You’ll meet the conditions if you’ve:
- held the EIS shares for at least 3 years (note that if you acquired EIS shares in a company which didn’t start to trade until a later date, the 3 years don’t start until that later date)
- received Income Tax relief in full on the whole of your subscriptions for the EIS shares and none of the Income Tax relief must have been withdrawn
EIS Income Tax relief is given for subscriptions for shares in unlisted companies which meet certain conditions, explained in the Enterprise Investment Scheme - introduction.
The maximum subscription which can qualify for EIS Income Tax relief in a particular tax year is set out below.
|Tax year||Maximum subscription which can qualify for Income Tax relief in any tax year|
|6 April 2012 to 5 April 2013 onwards||£1,000,000|
|Between 6 April 2011 to 5 April 2012 and 6 April 2008 to 5 April 2009||£500,000|
|6 April 2007 to 5 April 2008 and 6 April 2006 to 5 April 2007||£400,000|
|6 April 2005 to 5 April 2006 and 6 April 2004 to 5 April 2005||£200,000|
|Between 6 April 2003 to 5 April 2004 and 6 April 1998 to 5 April 1999||£150,000|
|6 April 1997 to 5 April 1998 and earlier||£100,000|
You may not have to pay Capital Gains Tax on a gain on your disposal of the EIS shares, even if you didn’t receive Income Tax relief in full on all your EIS shares, provided you received some Income Tax relief. In this case, to qualify for Disposal Relief, none of that Income Tax relief must have been withdrawn and the only reason you didn’t receive Income Tax relief in full was that your claim reduced your Income Tax liability to nil.
Only part of your gain may not be chargeable to Capital Gains Tax if part of the Income Tax relief on those shares has been withdrawn or if your acquisitions in the year exceed the maximum subscription.
When is Disposal Relief not due
There is no Disposal Relief on any gain arising on a disposal within 3 years of the date the EIS shares were issued to you. You can find the actual date of issue on the EIS certificate which the company sent you.
If you sell EIS shares within 3 years of the date they were issued (and the sale isn’t to your spouse or civil partner):
- Income Tax relief for those you sell will be wholly or partly withdrawn
- it will be chargeable to Capital Gains Tax, if you make a gain on the disposal
Disposal Relief isn’t available against a deferred gain which is revived on a disposal of the EIS shares or some other event.
If you make a loss on a disposal of your EIS shares at any time you can set this loss against your chargeable gains or you may be able to set it against your income. In calculating the loss, you must reduce the cost of your shares by the amount of any Income Tax relief given and not withdrawn.
Example 1 – Where you sell your shares at a loss
You subscribe £100,000 for 50,000 EIS shares on 1 May 2013. Income Tax relief of £30,000 is given. Less than 3 years later you sell all 50,000 shares for £60,000. Income Tax relief of £18,000 is withdrawn. Income Tax relief of £12,000 isn’t withdrawn and remains attributable to the shares sold.
|The allowable loss is calculated as follows:|
|Reduced by the Income Tax relief which has not been withdrawn||(£12,000)||£88,000|
Pages CGN 2 and CGN 3 of the Capital Gains Tax summary notes and Helpsheet 286 Negligible value claims and Income Tax losses on disposals of shares you have subscribed for in qualifying trading companies, explain how losses are allowed for capital gains and Income Tax purposes respectively. If you want to set the loss against your income you must claim Loss Relief within one year from the 31 January following the tax year in which the loss was made.
What are the main rules for calculating gains or losses on EIS shares
The normal capital gains rules apply but with exceptions. The main exceptions are that there are special share identification rules. You identify disposals out of a holding of shares which includes shares to which Income Tax relief is attributable on a first in, first out basis. Shares disposed of are identified first against the earliest acquisition. But this doesn’t help where you’re disposing of some shares from a holding which includes shares acquired on the same day, which have different reliefs attributable to them. For the share identification rules for this situation, go to VCM16020 or you can ask HMRC (contact details below) or your tax adviser for help.
What happens if you acquire more EIS shares in any tax year than can qualify for Income Tax relief and dispose of them at a gain after 3 years
Only part of the gain on your disposal won’t be chargeable to Capital Gains Tax.
You subscribe £600,000 for EIS shares issued by a trading company in June 2008. You receive the maximum Income Tax relief £100,000. You sell the shares at a profit in 2013 to 2014 and no Income Tax relief has been withdrawn in the meantime. Disposal Relief exempts five-sixths of the gain from Capital Gains Tax. (The five/sixths is the maximum investment for which Income Tax relief was available in the year your shares were issued, divided by the actual investment for which Income Tax relief was claimed, £500,000 ÷ £600,000.)
What happens when Income Tax relief has been partly withdrawn and you dispose of the EIS shares at a gain after holding them for 3 years
Only part of any gain on your disposal won’t be chargeable to Capital Gains Tax.
You subscribe £150,000 for EIS shares issued by a trading company on 1 June 2009. You receive the maximum Income Tax relief of £30,000. In 2010 to 2011 £10,000 of your Income Tax relief is withdrawn. You sell the EIS shares making a gain on 1 July 2013. Disposal Relief exempts two-thirds of the gain from Capital Gains Tax. (The two-thirds is the Income Tax relief given and not withdrawn, divided by the full Income Tax relief originally given, £20,000 ÷ £30,000.)
What happens where your Income Tax liability is nil
If you have no liability to Income Tax before taking account of your subscription for EIS shares, you’ll receive no Income Tax relief and any gain on the disposal of the EIS shares will be chargeable. You may be able to use your Capital Gains Tax annual exempt amount (£11,100 for 2016 to 2017) to cover all or part of your gain.
Do you need to disclose any gain arising from a disposal of the EIS shares on your tax return
You must give details of the disposal on the Capital Gains Tax summary pages of your tax return if either:
- the total value of the EIS shares and any other assets you disposed of in the tax year
- your total chargeable gains
were more than the figures shown on page TRG 3 of the Tax Return Guide.
What is Deferral Relief
When you dispose of an asset and make a gain you usually pay Capital Gains Tax for the tax year in which you dispose of the asset. Deferral Relief lets you treat the gain as not arising until some future date if you acquire EIS shares.
If you make a claim to defer a gain, the gain may be charged to Capital Gains Tax in a later tax year, usually when you dispose of the EIS shares. If you obtain Income Tax relief on an acquisition of shares, then you can claim Deferral Relief as well. You don’t have to obtain Income Tax relief to claim Deferral Relief.
To obtain full Deferral Relief you must invest an amount at least equal to the chargeable gain. Read the Capital Gains Tax summary notes.
Which gains can you defer
You can defer any gain which arises on your disposal of an asset. You can also claim Deferral Relief when a gain, previously deferred under the EIS Reinvestment Relief or the Venture Capital Trust scheme, is revived. (Revived means the gain is brought back into charge to Capital Gains Tax.)
Which EIS shares qualify for Deferral Relief
You can claim Deferral Relief if you subscribe for and are issued EIS shares. If your EIS shares were issued before the date on which the gain you claim to defer arose, you must still hold them at that date.
What are the time limits for subscribing for EIS shares to obtain Deferral Relief
The EIS shares you subscribe for must be issued to you in the period beginning 12 months before, and ending 36 months after, the date of the disposal for which you wish to claim relief. HMRC has discretion to extend these time limits and can explain the circumstances in which they will do this.
You dispose of an asset on 6 June 2013 making a gain. You can claim Deferral Relief against this gain if you subscribe for EIS shares and these shares are issued to you at any time between 6 June 2012 and 6 June 2016.
Who can claim Deferral Relief
You can claim relief if you are an individual resident or ordinarily resident in the United Kingdom (UK). You can’t claim relief if you are treated by double taxation arrangements as resident elsewhere, so that (ignoring any Disposal Relief) you would not be liable to UK Capital Gains Tax on any gain from the EIS shares. The trustees of certain settlements may also claim relief. Ask HMRC for details.
How do you claim Deferral Relief
You must complete the claim form attached to the EIS3 certificate you should receive from the company you’ve invested in and attach the form to the Capital Gains Tax summary pages of your tax return. If the gains against which you’re claiming Deferral Relief arose in the tax year to which this return relates, please put ‘OTH’ in box 36 on page CG 2. If you’re making more than one type of claim, please put ‘MUL’ in box 36. Provide details of the claim in the ‘Any other information’ box, box 54, or in your calculation, providing a clear statement that you’re claiming EIS Deferral Relief.
How much Deferral Relief can you claim
There is no upper limit on the amount you can invest in EIS shares in a year, though the amount you can invest in a single company is limited. You may claim less than the maximum Deferral Relief, for example, if you want to use your annual exempt amount to cover part of your gains.
In one tax year you have a gain of £100,000 on a disposal and you subscribe £100,000 for 100,000 EIS shares issued to you (in the same tax year). The annual exempt amount for the tax year is £11,100. You can claim Deferral Relief on the full amount of the gain of £100,000 or on any smaller amount, for example £88,900, leaving £11,100 to be covered by your annual exempt amount.
What is the time limit for claiming Deferral Relief
You can’t make a claim before you’ve received the relevant EIS3 certificate. The latest date for making a claim is 5 years after the first 31 January after the tax year in which the shares were issued.
You disposed of an asset in May 2011 and were issued EIS shares in August 2013. You must make a claim to relief by 31 January 2020.
When is the deferred gain revived
The whole (or part) of the deferred gain is revived when there is a chargeable event unless you die before a chargeable event occurs. There is a chargeable event if:
- you dispose of your EIS shares (unless the disposal is to your spouse or civil partner whilst living together, in which case the event occurs when that person disposes of the shares)
- you (or your spouse or civil partner to whom you have transferred your shares) cease to be resident in the UK, if this happens within 3 years from the time the shares were issued – but this doesn’t apply if whichever of you holds the shares takes up employment outside the UK and becomes resident again within 3 years, without disposing of any of the shares in the meantime
- the shares cease or are treated as ceasing to be eligible shares, for example, because the company is prevented from being a qualifying company
How do you report the revived gain
You must give details on page CG 2 of the Capital Gains Tax summary pages. Please also explain in the ‘Any other information’ box, box 54, on page CG 3, or in your supporting calculations, that the whole (or part) of the deferred gain to which the EIS Deferral Relief has been claimed is revived. Guidance on Entrepreneurs’ Relief and deferred gains can be found in Helpsheet 275 Entrepreneurs’ Relief and in the Capital Gains Tax Manual.
You can deduct the annual exempt amount for the tax year in which the deferred gain is revived to cover the whole or part of that deferred gain.
How much of the deferred gain is revived
The whole of any deferred gain is revived if:
- you dispose of all your EIS shares (see Example 7 below)
- the chargeable event isn’t a disposal of your EIS shares (for example, if within 3 years from the time the shares were issued, you emigrate intending to stay outside the UK permanently)
You defer a gain of £50,000 arising in 2012 to 2013 by subscribing £50,000 for EIS shares issued on 10 March 2012. If you sell all the EIS shares in March 2016, the whole of the deferred gain of £50,000 is revived in the tax year 2015 to 2016.
If you dispose of only some of your shares to which Deferral Relief is attributable, some of the deferred gain will be revived. The position is more complicated where you only dispose of some of your shares which you acquired at different times and you claimed Deferral Relief on some but not all of these shares. You have to identify the shares you have disposed of and the shares which have had Deferral Relief.
You defer a gain of £20,000 arising in 2012 to 2013 by subscribing £20,000 for 20,000 EIS shares issued on 10 March 2012. If you sell 15,000 EIS shares in March 2016, part of the deferred gain is revived in the tax year 2015 to 2016. As you have sold 15,000 out of the 20,000 shares, the same proportion (three-quarters) of the deferred gain is revived: £15,000.
What are the identification rules
You identify disposals out of a holding which includes shares to which Deferral Relief is attributable on a first in, first out basis. Shares disposed of are identified first against the earliest acquisition. When shares were acquired on the same day, and the only relief involved is Deferral Relief, you identify disposals first against shares acquired which don’t have Deferral Relief attributable to them.
For more information where shares are acquired on the same day and reliefs other than Deferral Relief are attributable to them, go to VCM16020 or ask us or your tax adviser for help.
You make one subscription of £80,000 for 80,000 shares which could qualify for EIS Relief. You claim £60,000 Deferral Relief. You sell 50,000 shares in a subsequent tax year. The £60,000 Deferral Relief is attributable equally to all 80,000 shares. As you have sold 50,000 of the 80,000 shares, the same proportion (five-eighths) of the deferred gain is revived: £37,500.
What happens if the EIS company makes a bonus issue of shares
Any Deferral Relief continues and is apportioned between the original shares and the bonus shares related to them.
What happens if the EIS company makes a rights issue of shares
If you subscribe for the rights shares this is treated as a separate subscription for the purposes of the Capital Gains Tax Reliefs. Any Deferral Relief continues but relates only to the shares on which it was originally given.
Online forms, phone numbers and addresses for advice on Self Assessment.