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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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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 - examples

Example 1: a ‘first relevant chargeable event’ before 23 June 2010

Example 2: a “first relevant chargeable event” on or after 23 June 2010

Example 1: a ‘first relevant chargeable event’ before 23 June 2010

In May 2004 L disposed of shares in her ‘personal company’. A capital gain of £10,000,000 arose at this time. £6,000,000 of that gain is deferred being used to invest in 1,000 qualifying EIS shares. Three ‘chargeable events’ then take place to bring that £6,000,000 into charge as follows:-

  • On the 31st August 2007 - 100 EIS shares sold = £600,000 gain
  • On the 10th April 2009 a further 300 EIS shares are sold, and finally
  • On 30th April 2010 the remaining 600 EIS shares are sold.
Total gain £6,000,000
   
First Event on 31st August 2007 - 100 EIS shares were sold and  
upon this event the amount of the ‘relevant gain’ will come back into  
charge and be reduced by any taper relief due. No Entrepreneurs’  
Relief is due at this time. This proportion of the deferred £6,000,000  
gain will be 100/1,000 = £600,000
Deferred gain remaining= £5,400,000
   
Second Event on 10th April 2009- Taper relief has now been  
withdrawn but Entrepreneurs’ Relief may be considered on the  
assumption that Entrepreneurs’ Relief existed at the time of the  
disposal of the original shares in May 2004 and if L makes a claim.  
   
This is the ‘first relevant event’. 900 relevant shares remain before  
this event out of the 1000 total. The deferred gain remaining  
(£6,000,000 x 900/1,000) = £5,400,000.  
   
Provided Entrepreneurs’ Relief up to the full lifetime limit is available  
then £1,000,000 is reduced by 4/9 giving a deferred gain after  
Entrepreneurs’ Relief of = £555,555
   
This is a separate gain to that part of the deferred gain which is not  
reduced by the application of Entrepreneurs’ Relief which is.  
£4,400,000  
   
But because not all of the relevant shares are the subject of this  
chargeable event only a proportion corresponding to the 300 shares  
disposed of will become a chargeable gain in 2009-10 i.e. 300/900 x  
£555,555 = £185,185
This leaves a gain remaining net of entrepreneurs relief of  
£370,370  
   
In addition 3/9 of the part of the deferred gain not subject to the  
Entrepreneurs’ Relief will be attributable to this disposal of shares.  
3/9 of £4,400,000  
[Paragraph 4(1)(b) Schedule 5B refers] £1,466,667
   
Total chargeable gain, taxable at the 18% CGT rate. £1,651,852
   
Capital Gains Tax £297,333.36
   
Third Event on 30th April 2010- 600 of the 900 shares held  
immediately before the ‘first relevant event’ are sold so 600/900 of  
the £555,555 gain resulting from the Entrepreneurs’ Relief claim  
accrues = £370,370
   
In addition 6/9 of the part of the deferred gain was not subject to  
the Entrepreneurs’ Relief claim will be attributable to this  
disposal of shares. 6/9 of £4,400,000 = £2,933,333
   
Total chargeable gain, taxable at the 18% CGT rate. £3,303,703
   
Capital Gains Tax. £594,666.54
   
Note that although this final disposal took place at a time the  
lifetime limit was £2,000,000, that revised limit does not apply to  
the disposal  

 

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Example 2: a “first relevant chargeable event” on or after 23 June 2010

This is similar to the example above. In May 2004 L disposed of shares in her ‘personal company’. A capital gain of £10,000,000 arose at this time. £6,000,000 of that gain is deferred being used to invest in 1,000 qualifying EIS shares. Three ‘chargeable events’ then take place to bring that £6,000,000 into charge as follows:-

  • On the 31st August 2007 - 100 EIS shares sold = £600,000 gain.
  • On the 20th August 2010 a further 300 EIS shares are sold, and finally,
  • On 17th July 2011 the remaining 600 EIS shares are sold.
Total gain £6,000,000
   
First Event on 31st August 2007 - 100 EIS shares were sold and  
upon this event the amount of the ‘relevant gain’ will come back into  
charge and be reduced by any taper relief due. No Entrepreneurs’  
Relief is due at this time This proportion of the deferred £1,000,000  
gain will be 100/1,000 =. £600,000
Deferred gain remaining £5,400,000
   
Second Event on 20th August 2010 - Taper relief has now been  
withdrawn but Entrepreneurs’ Relief may be considered on the  
assumption that Entrepreneurs’ Relief existed at the time of the  
disposal of the original shares in May 2004 and if L makes a claim.  
   
This is the ‘first relevant event’. 900 relevant shares remain before  
this event out of the 1000 total. The proportion of the deferred  
£6,000,000 gain will be 900/1,000 = £5,400,000.  
   
L has previously made claims that have used £1,500,000 of her  
lifetime limit for Entrepreneurs’ Relief (unrelated to the EIS shares).  
The effect of making a claim in respect of the deferred gain is to  
create a separate gain of £3,500,000 (the balance of her lifetime  
limit) that is chargeable at the 10% rate.  
   
This is a separate gain to that part of the deferred gain which is not  
reduced by the application of Entrepreneurs’ Relief which is  
£1,900,000.  
   
But because not all of the relevant shares are the subject of this  
legislation first apportion the overall deferred gain that is subject to  
the claim (before any restriction under the lifetime limit) by  
reference to the 300 shares disposed of and the number of shares  
held immediately before that disposal: 300/900 x £5,400,000 = £1,800,000
   
This is less than the amount of gain qualifying for Entrepreneur’s  
Relief so is all charged at the 10% Entrepreneurs’ Relief rate. £180,000
     
  Therefore £1,700,000 (£3,500,000 - £1,800,000) of the  
  Entrepreneurs’ Relief gain remains deferred together with the  
  balance of deferred gain of.£1,900,000.  
     
  Third Event on 17th July 2011 - 600 of the 900 shares held  
  immediately before the ‘first relevant event’ are sold so the  
  remaining 600/900 of the£5,400,000 gains subject to  
  Entrepreneurs’ Relief claim accrues = £3,600,000
     
  Of this amount, £1,700,000 represents the gain qualifying for  
  Entrepreneurs’ Relief. £1,700,000
     
  Tax at the 10% Entrepreneurs’ Relief rate. £170,000
     
  The balance is charged at L’s normal CGT rate of 28%. £1,900,000
     
  Tax at (say) the 28% CGT rate. £532,000
     
  Total Capital Gains Tax. £702,000

These examples ignore the availability of the Annual Exempt Amount.