Entrepreneurs’ Relief: Enterprise Investment Scheme and Venture Capital Trust investments before 6th April 2008 - deferred gains coming back into charge after 6th April 2008 - transitional rules
FA2008 Schedule 3 Paragraph 8
FA2008/Sch3/Para8 provides transitional rules to allow claims for Entrepreneurs’ Relief where:-
- A charge to CGT in respect of all or part of a gain arising to an individual (“the investor”) before 6 April 2008 has been deferred because the investor has invested an equivalent sum in shares qualifying for relief under the Enterprise Investment Scheme (“EIS shares”) or in shares in a Venture Capital Trust (“VCT shares”) - see CG62800 for ‘EIS’ and CG57450 for ‘VCT’, and
- all or part of that gain comes into charge on the occasion of a “chargeable event” (for example, the sale of the EIS or VCT shares) on or after 6 April 2008.
Where a gain has been deferred by reason of an investment in EIS or VCT shares (described as ‘relevant shares’) a proportionate part of the deferred gain is attributed to each share. When a ‘relevant chargeable event’ occurs after 6th April 2008 which relates only to some of the ‘relevant shares’ (for instance, where some but not all of the ‘relevant shares’ are sold), the deferred gain attributed to those shares comes into charge at that time - FA2008/Sch 3 Para8(2).
In this transitional rule, the ‘first relevant chargeable event’ is the first ‘relevant chargeable event’ under the EIS or VCT rules that happens on or after 6 April 2008.
Entrepreneurs’ Relief may be claimed at the time of the ‘first relevant chargeable event’ on or after 6 April 2008. A claim will apply to the whole of the deferred gain that attaches to EIS or VCT shares held by the investor immediately before that chargeable event - FA2008/Sch3/Para8(3).
If the investor has transferred some of the ‘relevant shares’ to his or her spouse or civil partner, so that those shares are not held by the investor at the time of the ‘first relevant chargeable event’, no Entrepreneurs’ Relief can be claimed in respect of the gain attaching to those shares, even if they are subsequently returned to the investor before that gain becomes chargeable. If however the shares are returned to the investor before the ‘first relevant chargeable event’, the whole of the gain can qualify for Entrepreneurs’ Relief.
Entrepreneurs’ Relief can be claimed in respect of the deferred gain only if the ‘relevant disposal’ would have been a material disposal of business assets if Entrepreneurs’ Relief had been in force at the time of that disposal - FA2008/Sch 3 Para8(4).
The ‘relevant disposal’ is either the disposal on which the original gain arose or, where the gain that was deferred was itself the deferral of a gain that had already been deferred on an earlier occasion and then comes into charge, the disposal that gave rise to that first gain.
So if a gain that arose on the disposal of an asset in 2001 was deferred by investing in EIS shares, and in 2005 an amount of gain treated as arising on a chargeable event in relation to those EIS shares was itself deferred against a further investment in EIS shares, then on the occasion of a chargeable event on or after 6 April 2008 in relation to the shares comprising that later investment, the ‘relevant disposal’ is the disposal in 2001.
If an Entrepreneurs’ Relief claim is made under these transitional rules, the gains in respect of which relief is given will be part of the claimant’s maximum amount of lifetime limit of gains qualifying for relief, even though part of those gains may not become chargeable until the occurrence of a future chargeable event.
The time limit for claiming Entrepreneurs’ Relief (see CG63970) in respect of a ‘relevant disposal’ is the normal time limit for amending a self-assessment return for the tax year in which the ‘first relevant chargeable event’ takes place, that is by the first anniversary of 31 January after the end of the tax year in question.
The way this transitional rule applies altered as a result of the changes to Capital Gains Tax in Finance Act (2) 2010. The rule applies differently depending on when the “first chargeable event” took place.
Where the “first relevant chargeable event” happened before 23 June 2010
The original version of the transitional rule applies in cases where all or part of the gains deferred as at 6 April 2008 came into charge as the result of a “relevant chargeable event” occurring from 6 April 2008 to 22 June 2010.
The amount of that gain (assuming the conditions of Entrepreneurs’ Relief are met) is reduced by 4/9ths under TCGA92/S169N(2) - see CG64125 - subject to the lifetime limit on gains qualifying for relief applicable at the time of the first “chargeable event” on or after 6 April 2008. That lifetime limit is £1 million from 6 April 2008 to 5 April 2010 and £2 million from 6 April 2010 to 22 June 2010.
Where all the relevant shares held by the investor are not disposed of at the time of the ‘first relevant chargeable event’ then on each relevant chargeable event on or after 6 April 2008, a proportion of the total amount calculated above (the amount net of Entrepreneurs’ Relief [FA2008/Sch3/Para8(7)]) comes into charge. That proportion reflects the amount of relevant shares disposed of out of the total relevant shares held by the investor immediately before the time of the ‘first relevant chargeable event’.
So, if the ‘first relevant chargeable event’ is a disposal of one-third of the relevant shares held the amount chargeable at that time is one-third of the net gain, computed under FA2008/Sch3/Para8(7) above. The balance of the net gain will then come into charge on later relevant chargeable events, again reflecting the proportion of the shares disposed of to the total held immediately before the first relevant chargeable event.
Where part of such a gain then becomes chargeable on or after 23 June 2010, the reduced gain will be charged at the normal CGT rate as is applicable at the time.
See Example 1 at CG64171
Where the “first relevant chargeable event” happens on or after 23 June 2010
F(No.2)A2010/Sch1/Para10 revised the transitional provisions following the change to the way in which Entrepreneurs’ Relief is given. The revised approach has effect only in cases where none of the gain deferred as at 6 April 2008 has come into charge between 6 April 2008 and 22 June 2010,
When all or part of the gain deferred as at 6 April 2008 first comes into charge because of a “relevant chargeable event” on or after 23 June 2010, a claim for Entrepreneurs’ Relief in respect of the deferred gain can be made under the transitional provisions in FA2008/Sch3. Where such a claim is made (and the other conditions for the relief are satisfied at the time the gain arose), the deferred gain is charged at the Entrepreneurs’ Relief rate of 10%, subject to the revised lifetime limit of £5 million.
Where all the relevant shares held by the investor are not disposed of at the time of the ‘first relevant chargeable event’ then on each subsequent ‘relevant chargeable event’, a proportion of the total deferred gain comes into charge. That proportion reflects the amount of relevant shares disposed out of the total relevant shares held by the investor immediately before the time of the ‘first relevant chargeable event’.
See Example 2 at CG64171