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How to claim your EIS tax reliefs: capital gain tax

The Enterprise Investment Scheme (EIS) was the first of the Venture Capital Schemes, created as the successor to the Business Expansion Scheme in 1994. Designed to promote investment into unlisted early-stage businesses, EIS has been successful in ensuring a steady stream of capital to the businesses that need it the most, with over £16.2 billion of funds raised up to October 2017.

The scheme offers investors the ability to back unlisted businesses, which generally represent higher risk due to their early stage and lack of liquidity. However, this is offset by a collection of tax reliefs and incentives that reduce the total exposure while maximising potential upside.

Read more: capital gains tax and the EIS: what you need to know as an investor

Last week we looked at the 30% income tax relief that can be claimed on EIS shares and how this can be done. One of the most notable tax reliefs available, today I wanted to look at another of the most popular - those related to Capital Gains Tax (CGT).

An overview of capital gains tax reliefs

Following income tax relief, the pair of incentives targeting Capital Gains - deferral and disposal relief - are probably the most important offered by the scheme for many, particularly the exemption offered at exit.

The first - capital gains deferral - is offered at the point of investment and allows the investor to defer all or part a capital gain liability, up to the amount reinvested into EIS shares.

Interestingly, this still applies beyond the income tax relief limit in a year, so any amount can be reinvested in EIS shares and the deferral claimed, even if one a part of this amount obtains income tax relief.

The result of this deferral is that the gain is treated as having occurred at a later time, when the shares are disposed of or become ineligible, meaning they are subject to tax at that time. This means the gain can be spread over these years, maximising use of allowances and any beneficial changes in tax regime. Even better, when the gain is revived, you can reinvest again and defer it, something that can effectively go on indefinitely.

At this point you may wonder why would you do this if you are, hopefully, going to make a gain from the EIS share anyway. Surely you are just going to use up your allowance there and still need to pay the same tax? This is where the second capital gains tax relief - disposal relief - comes in.

With this relief, when EIS shares are disposed of for a gain, they are exempt from capital gains tax without affecting your annual allowance. This means that if you achieve growth on your EIS-eligible shares you will pay no tax on the gain that is made, allowing this to be used to settle the deferred tax liability.

A step-by-step guide of how to claim the tax relief

To claim disposal relief, you must have held the qualifying shares for a minimum of 3 years from when the shares were issued, or 3 years from when the company began trading, if later. This 3 year holding period is the same as that required for you to receive income tax relief in full, so is usually quoted as the general holding period for EIS-eligible shares.

More interestingly you must also have claimed income tax relief in full on your subscription, with none of the income tax relief withdrawn. This condition is relaxed somewhat in the case that you are unable to claim the full relief - if you have invested sufficient to reduce your income tax liability to zero, for example. In this case, you need to have claimed some income tax relief and not had any of this amount withdrawn. However, if you have invested more than the maximum subscription in a year, only part of the gain may be capital gains exempt.

This relief is offered automatically, as long as the qualifying conditions are met. Therefore the gain is treated as an exempt gain, so does not need to be included in your disposal proceeds. However, details of the disposal should be included in the 'Any other information' box of your Capital Gains summary form, as part of your annual tax return, so to make it clear that EIS shares were disposed of, which are exempt.

As with income tax relief, to claim capital gains deferral you need to wait until you receive the EIS3 form from the issuing company before you can claim any relief. You do not need to have received income tax relief on the EIS shares - this can be claimed independently of any other reliefs.

To claim deferral relief you must complete the claim form attached to the EIS3 certificate. This form is then attached to the capital gains summary pages of your tax return, and if the gain against which you are claiming deferral relief arose in the tax year to which this return relates, details of the claim should be provided in the ‘Any other information’ box, or in your computation, providing a clear statement that you are claiming EIS deferral relief. You must still include these chargeable gains in the capital gains summary pages when completing your tax return.

Using information to know when claiming the capital gains tax reliefs

One key point to be considered when investing in EIS-eligible shares is that the disposal relief is only offered when income tax relief is claimed, as already mentioned. One corollary of this is in the case when an individual has a nil income tax bill before reliefs. In this instance no income tax relief would be claimed on the investment and therefore no disposal relief would be offered despite the individual not being in a position to claim relief.

For deferral relief, this can be claimed against any gain arising on disposal of an asset, including previously disposed EIS shares when a gain is revived. 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 this disposal. You must then make your claim for deferral relief within 5 years of the 31st January following the tax year in which the shares were issued. For example, if you are issued shares in May 2018 you must claim your deferral relief by 31st January 2025.

Read more: 6 facts you might not know about EIS tax reliefs

As we have already mentioned, you cannot claim relief until the company sends you an EIS3 certificate, which it cannot do until it has been trading for at least 4 months. Therefore it can take a few months for the application to be completed and the certificates issued. This certificate will contain all of the information related to the investment that is required, including the issuing HMRC office and their reference.

This certificate must be kept safe, as HMRC may request that the original be sent in as evidence for the claim. As they are only issued as hard copies, another form must be requested if lost, which again can take a few months.

If you are unsure about any of the details regarding EIS income tax relief, professional advice should be sought or if you have any specific questions please contact the team at Small Company Enterprise Centre on 0300 123 1083 or email enterprise.centre@hmrc.gsi.gov.uk.

Making an investment into EIS-eligible opportunities

The benefits of investing into companies under the EIS can be vast and varied. From making an impact by backing the next generation of British businesses through to creating a diverse portfolio of tax efficient investments, investments at this stage are seen as higher risk/higher return, but the tax reliefs that are a key part of the EIS are provided to directly mitigate some of the risk.

With our EIS-investment opportunities highly vetted and the companies worked with closely, we're confident that the EIS can continue to help drive forward the UK's startup and scale up economy.

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