Deferral relief is available for gains on any type of asset
Deferral relief is available for gains on any type of asset if the gain is re-invested into an Enterprise Investment Scheme (EIS) investment. The EIS shares that you invest in must be issued to you no more than 36 months after the disposal that gave rise to the gain, or no more than 12 months before a future disposal that you expect will result in a gain
Every investor is entitled to an annual capital gains allowance below which no CGT is payable. Currently this allowance is £11,300, so your taxable gain would be £50,000. For a higher rate taxpayer CGT is currently 20% for shares or any other property (except residential property, which is taxed at 28%). So this means your tax payable would be 20% of £50,000, or £10,000. You could look at this as giving rise to a 100% chance of “losing” this £10,000 in the form of CGT.
Suppose instead that you re-invested the £50,000 taxable gain from your Tesco shares in a high quality EIS investment. Deferral relief means you won’t have to pay the £10,000 CGT to HMRC right away. Instead, you can actually claim 30% income tax relief on the investment, which means your tax bill will be reduced by 30% of £50,000, or £15,000. So the net cost to you of the EIS investment is really only £35,000.
If you later sell the EIS investment for £75,000 then you will be entitled to capital gains relief, so no CGT will be payable at all on the £25,000 gain from your EIS investment. However, the previous £10,000 CGT on your Tesco shares is now “revived” and has to be paid to HMRC. Of course, you could choose to re-invest the gain in another EIS investment which would let you continue to defer the original gain from your Tesco shares. This process can be repeated over and over again, and no interest is payable to HMRC on deferred gains.
What happens if your EIS investment fails and becomes worthless? In that case you can claim loss relief on the net cost of the EIS investment at your marginal tax rate. A higher rate taxpayer can claim loss relief at the rate of 40%, so could reduce their tax bill by 40% of the £35,000 net cost of the EIS investment, or £14,000.
And that’s not all. The £10,000 CGT liability from your Tesco investment is extinguished. In this situation, your true “loss” on the EIS investment is just £11,000 (the £50,000 you invested, less the £15,000 income tax relief, less the £14,000 loss relief, less the £10,000 CGT on the Tesco shares that you no longer have to pay). Effectively what you have done is turn a 100% chance of losing £10,000 into a much lower chance of losing £11,000 but with the potential to earn a substantial tax free gain. The chance of loss can be further reduced (but never eliminated) by choosing to invest in a high-quality, diversified EIS fund that spreads your investment across several asset-backed companies.
The rules around EIS investments can be complicated so you should consult with your tax adviser before making this kind of investment. However, if you have recently made a gain on one of your investments then using EIS to defer your CGT is worth a serious look.