The Chancellor announced an important and welcome change to CGT Reinvestment Relief in his 2014 Autumn Statement regarding the treatment of certain capital gains which are reinvested under the Enterprise Investment Scheme (EIS).
Individuals who sold their business were encouraged to reinvest their capital gains in EIS venture capital shares but were often reluctant to do so because the gains when finally realised would not qualify for the special rate of CGT applicable to qualifying gains.
RULES APPLICABLE PRIOR TO 3 DECEMBER 2014
Under the original rules any gains which qualified for Entrepreneurs’ Relief (ER) and which were reinvested under the EIS ceased to qualify for the special 10% ER rate on the eventual disposal of the EIS shares.
This meant that such reinvested gains were eventually taxed at the normal rates of CGT of 18% and/or 28% rather than at 10% when the gains were initially realised on the disposal of a qualifying business.
THE NEW RULES
From 3 December 2014 capital gains which qualify for Entrepreneurs’ Relief and which are deferred into investments qualifying for the EIS will remain eligible for the special 10% rate of CGT when the EIS shares are eventually sold.
The above changes also relate to the Social Investment Tax Relief (SITR) scheme which was introduced from 6 April 2014 which is designed to support charities and social enterprises in accessing finance from individual investors and which is modelled on the Enterprise Investment Scheme.
An entrepreneur sold his 20 year old sole trader business in October 2014 realising £2 million of capital gains qualifying for CGT Entrepreneurs’ Relief. Early in 2015 he is considering reinvesting the £2 million gains in EIS qualifying shares. Assume that he is a higher rate taxpayer.
Without reinvestment the gains he would be taxed at the ER special CGT rate of 10% so that CGT of £200,000 would be due on the 31 January 2016 (ignoring any available annual CGT exemption).
If he reinvested the £2 million of gains in EIS shares then as it is post-2 December 2014 the CGT can be deferred but the gains would continue to be eligible for the special 10% rate until the EIS shares are sold.
Under the previous rules, the reinvested gains would have lost their ER status and be eventually taxed on the sale of the shares at 28% (the rate of CGT applicable to higher rate taxpayers).