Capital Gains Deferral

Individuals can defer CGT on an unlimited amount of chargeable gains by making an Investment through a Fund of an amount equivalent to the chargeable gain.

The Investor can defer a liability to CGT by investing an amount equivalent to the capital gain in an Investment made through the Fund. The Investment must be made and issued to the Investor in the period beginning twelve months before and ending three years after the date of the disposal-giving rise to the capital gains to be deferred. There is no limit on the amount of capital gains, which can be deferred. Investors should note that the Capital Gains Deferral is only a deferral of the original gain to CGT and that gain will crystallize on a disposal of the Investment (subject to CGT Revived Gains below) unless there is a further Capital Gains Deferral. The gain is deferred until there is a chargeable event, such as a disposal of shares. It should be noted that such a transfer into an AIM listed company may amount to a disposal for CGT purposes. The Fund Manager will consult with investors and will endeavour to structure any such transfer in a tax-efficient way, although it is possible that there would be a “clawback” of any deferral relief claimed by an investor in connection with such shares.

Example:                  

Initial Net Investment          £50,000

EIS Relief                          £(10,000)

CGT Deferral                      £(20,000)

Net cost of Investment         £20,000

Loss Relief

Any capital losses realised in respect of an Investment made through a Fund net of EIS Relief attributable to the Investment qualify for loss relief in that the capital loss can be set against capital gains of that tax year or a later tax year or against income of that tax year or income of the preceding tax year.

Capital Gains Taper Relief

Any capital gain on an Investment, which does not qualify for CGT exemption, should qualify for Capital Gains Taper Relief, which applies an effective rate of CGT at 10% for Investments held for two years.

Any capital gain on the disposal of an Investment made through a Fund qualifies for Capital Gains Taper Relief to the extent to which it does not qualify for CGT exemption. The Capital Gains Taper Relief gives an effective rate of CGT at 10% where the Investment has been held for two years.

CGT Revived Gains

Any capital gains deferred into an Investment made through a Fund, which are revived on the subsequent disposal of the Investment, may qualify for an amount of Capital Gains Taper Relief.

Inheritance Tax (IHT) Relief

The Investments made through the Fund should in most cases qualify for 100% relief from IHT in the event of the death of an Investor as long as the Investment has been held for two years.

Investments in EIS Qualifying Companies should in most cases qualify for 100% relief from IHT in the event of the death of an Investor as long as the Investments have been held for two years.

Example:

Initial Net Investment                                      £50,000

EIS Relief (at 20%)                                        £(10,000)

CGT Deferral (at 40%)                                    £(20,000)

IHT Relief (at 40%)                                        £(20,000)

Net cost of Investment                                       NIL

NOTE. The Net amount is the sum after charges that are applicable for tax relief and not the Gross, which is the sum, subscribed. Your tax relief is on the investment in the EIS qualifying company only.

Trustees

Trustees of a trust, where, on certain conditions, the beneficiaries are individuals, will usually qualify for unlimited Capital Gains Deferral, Capital Gains Taper Relief, Loss Relief (limited to capital gains) and IHT Relief. However, it must be remembered that neither EIS Relief nor exemption from CGT are available to trustees.

The effect of the Inland Revenue approval of the EIS Fund under Section 251 of the Income Taxes Act 2007 is that each Investor can obtain EIS relief in the tax year of the Closing Date, and there is no minimum amount, which the Investor has to subscribe through the Fund before obtaining EIS Relief. The certificate stating and confirming the EIS Relief obtained by an Investor is on Form EIS 5 issued by the Manager rather than on a Form EIS 3 issued by the EIS Qualifying Company.

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