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CGT Deferral Relief & Reinvestment Relief Examples

CGT Deferral Relief & Reinvestment Relief Examples

 

Capital Relief
With EIS, CGT on gains realised on different assets can be deferred if an investor invests their gain into EIS qualifying shares. To receive this relief the investor must subscribe for EIS shares during the period 1 year before or 3 years after selling or disposing of their assets that generated the gain being deferred – i.e. gains made 3 years before or 1 year after the date of the EIS investment can be deferred. It is not necessary to claim EIS Income Tax relief to obtain deferral relief. Deferral relief is unlimited and can also be claimed by investors (individuals or trustees) whose interest in the company does not fail the 30% tests.

If the shares against which the gains are deferred are held until death, the deferred gain is never chargeable, so the deferral is indefinite.

On Exit
There are various circumstances in which a chargeable event may occur relating to deferred gain resulting in the gains, becoming chargeable. Individuals and trustees should seek advice about the events which could trigger the withdrawal of relief.

With SEIS, investors can benefit from Reinvestment Relief on 50% of the gain realised from assets. The investor must claim relief against a gain in the same year as Income Tax. Unlike EIS, where the gains are deferred, with Reinvestment Relief, the 50% tax on gains does not become repayable in the future.


Worked Example

 

A higher rate tax payer has a £300,000 capital gain on the disposal of a second home. The investor has already used their full annual CGT allowance. They invest £100,000 in an EIS and £100,000 in an SEIS. The amount of the gain that can be deferred has no maximum and

is limited only by the amount subscribed for eligible shares in an EIS qualifying company. Gains may be deferred until the EIS qualifying shares are disposed of or, if earlier, when other events trigger withdrawal of the deferral relief. Once the shares in the EIS Company have been sold, the deferred gain will fall back into charge to CGT in the year of disposal. With the SEIS, Reinvestment Relief is available on 50% of the gains and this is not repayable, providing Income Tax relief is not withdrawn.

The example assumes the investor is liable to “CGT” at the rate of 28%, which is the higher rate of CGT on the sale of residential property that is not the main residence.

Example – £100,000 capital gain invested into an EIS and an SEIS, and Income Tax relief is also claimed

EIS
SEIS
Initial Investment
£100,000
£100,000
Less Income Tax Relief @ 30% or 50% (£30,000) (£50,000)
Capital Gains Deferral Relief (assuming CGT at 28%) (£28,000)
Reinvestment Relief (assuming CGT at 28%) (£14,000)
Net Cost to Investor £42,000 £36,000
Shares Sold – Hypothetical Value*
Hypothetical Sale Value £160,000 £160,000
Capital Gain £60,000 £60,000
Chargeable Capital Gain (tax free if held for more than 3 years) £0 £0
Deferred Gain Becomes Chargeable £100,000
Tax payable on deferred gain at 28% (£28,000) Nothing is payable with Reinvestment Relief
Value of EIS deferral relief Capital gains tax of £28,000 has been deferred. This can potentially be deferred again in new EIS or by for example using future CGT allowances etc.
Net Profit on the Net Cost to Investor
£90,000
£124,000

*The hypothetical values are for illustration purposes only.

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