Firstly, it will not be possible to roll over the gain using roll over relief. Both the old asset and the new asset must be qualifying business assets as defined by TCGA 1992 s155. Shares are not a qualifying business asset for the purposes of roll over relief.
It may be possible, however, to defer the gain using EIS reinvestment relief. The relief is available where there is a chargeable gain arising on the disposal of any asset and the proceeds are reinvested into a subscription for shares in an EIS company where the following conditions are met (TCGA 1992 Sch. 5B para 1):
- The individual is UK resident at the date of disposal of the asset and at the date of subscription for the shares.
- The shares are subscribed for within the 12 months prior or the 36 months following the disposal of the asset.
- The individual makes a qualifying investment (broadly that the shares are subscribed for shares that are fully paid up in cash and the funds are used by the company wholly for the purposes of the qualifying trade – all the conditions for a qualifying investment can be found in HMRC’s guidance at VCM23020)
- Claim for relief should be made within 5 years from the 31st January after the end of the tax year in which the shares are issued. (See HMRC’s guidance in HS297 on how to make a claim)
It is worth noting that the individual need not qualify for EIS income tax relief to qualify for EIS reinvestment relief. It is therefore possible for an individual connected with the company to qualify for EIS reinvestment relief. However, the company must still be a qualifying EIS company under Part 5 ITA 2007 which appears to be the case here.
The amount of the gain that can be deferred is restricted to the amount reinvested into the shares. However, it is possible to claim less than the maximum available for relief to utilise the annual exempt amount or capital losses. This is important because the relief works as a deferral. The gain (or the specific amount claimed) is frozen until such time that a chargeable event occurs. At the time of the chargeable event, the gain is crystallised and is brought back into charge. Chargeable events are as follows (TCGA 1992 Sch. 5B para 3)
- Disposal of the EIS shares by investor or by the spouse of the investor if the shares have been transferred to the spouse.
- The individual (or spouse of the investor that the EIS shares have been transferred to) becomes non-resident within the 3 years following the share issue.
- The shares cease to be eligible shares.
Although the above allows for transfers between spouses to be ignored as a chargeable event, the Business Asset Disposal Relief (BADR) claim under TCGA 1992 s169U mentioned below, requires the same person who made the original gain to be the person who makes the subsequent gain. Therefore, an inter-spouse transfer would mean no BADR would be available on a later gain.
On the disposal by your client of the shares, the gain is revived and taxed in the year of the chargeable event. (TCGA 1992 Sch. 5B para 4). As the client’s disposal of the original asset was a qualifying business disposal that would have qualified for BADR at the time of the disposal, it is possible for the client to make a claim for BADR to apply to the revived gain. (TCGA 1992 s169U) The client must make a claim for BADR by 31 January following the tax year in which the gain is revived.
Consideration would also need to be taken as to whether the disposal of the shares gives rise to a separate chargeable gain or whether it can qualify for disposal relief. For EIS shares generally, providing the shares were held for 3 years before being disposed of, the share disposal itself would qualify for disposal relief under TCGA 1992 s150A but only if some EIS income tax relief was attributable to the EIS shares. Therefore, although there is no need to obtain income tax relief on the EIS investment to obtain deferral relief, it’s absence would mean that any gain arising on the disposal of the EIS shares would not be exempt.
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