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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: disposal relief: CGT exemption

TCGA92/S150A (2)

The earliest the CGT exemption can apply is 1 January 1999. A gain on a disposal of shares on which Income Tax relief has been claimed may be exempt if the disposal is made on or after the termination date, see VCM23070, relating to those shares or, where the shares were issued before 6 April 2000, more than five years after the shares were issued. If the shares are disposed of before the termination date relating to those shares or, where the shares were issued before 6 April 2000, within five years after issue, the Income Tax relief or part of it will be withdrawn, see VCM15000+. There is no CGT exemption for any gain arising on such a disposal.

The investor may not be able to obtain Income Tax relief because their total income is too low or their income tax liability is reduced to nil by other reliefs. If the investor does not obtain any Income Tax relief on a subscription for shares in an EIS company there is no CGT exemption for those shares. CGT exemption is available if some Income Tax relief is given even though the effect of the claim is to reduce the investor’s Income Tax liability to nil, see VCM20060.

If Income Tax relief is obtained in full (that is, the amount of relief is equal to tax at the lower rate on the full amount of the subscription), and it is not withdrawn or reduced, there is no restriction on the CGT exemption. For example, an investor subscribes £50,000 for 200,000 25p ordinary shares in an EIS company. The investor receives £10,000 Income Tax relief, none of which is subsequently withdrawn. All 200,000 shares would qualify for CGT exemption on disposals made on or after the termination date, see VCM23070, relating to those shares or, where the shares were issued before 6 April 2000, more than five years after the shares were issued.

The holding of a compliance certificate (form EIS3 or EIS5) by an investor does not mean that any disposal of the relevant shares will be exempt from capital gains tax. The EIS3 or EIS5 merely indicates that from the time of investment to the date the company provides its compliance statement, the company is considered to have met the relevant qualifying conditions. It does not indicate either that the company has continued to meet those conditions for the whole of the qualifying period for the shares, or that the investor has met the necessary conditions for relief to be available. In particular, if an investor holds a form EIS3 or EIS5 but does not make a claim to income tax relief, no disposal relief will be available.