Until recently, individuals who wanted to minimise their exposure to CGT on the sale of a business had to choose between paying 10% CGT by claiming entrepreneurs’ relief (ER), or to defer the gain using the Enterprise Investment Scheme (EIS) or the new Social Investment Tax Relief (SITR).
The gain subject to the ER claim can’t be deferred, as it has already been taxed. Thus, on the sale of a business, the taxpayer has had to choose whether to claim ER and pay tax on the net gain at 10%, or defer the taxation of the gain by investing in shares issued under EIS, or shares or debt instruments issued under social investment tax relief (SITR). Reinvesting the gain using Seed Enterprise Investment Scheme (SEIS) provides an exemption for 50% of the gain, not a deferral of the gain.
The gain deferred using EIS or SITR falls back into charge to CGT when the EIS or SITR investment is disposed of, or when the investment conditions are broken. At that stage it is normally too late to claim ER, and anyway a claim for ER would mean 10% CGT becomes payable retrospectively based on the date of the sale.
For investments in EIS or SITR made on or after 3 December 2014, the individual can choose to defer an ER-qualifying gain, and then claim ER when that investment is disposed of. This allows the taxpayer to get the best of both tax reliefs: defer the gain for a period that suits the taxpayer, then take advantage of the 10% rate of CGT by claiming ER when the deferred gain falls back into charge.
A gain can be deferred by investing under the EIS or SITR up to three years after the date the gain was made, or one year before that date. So even if the gain has already been made, it is not too late to use the EIS or SITR instead of ER. Of course appropriate investment advice should be taken before making a risky investment under EIS or SITR.
The EIS shares or SITR shares or debt can be disposed of in small tranches over a number of years and, at each disposal, a relevant proportion of the deferred gain falls back into charge for CGT.
Rebecca Cave is co-author of Capital Gains Tax Reliefs for SMEs and Entrepreneurs 2014/15 (http://www.bloomsburyprofessional.com/uk/capital-gains-tax-reliefs-for-smes-and-entrepreneurs-201415-9781780434445/)