EIS gains deferral is now not just a deferral

EIS Deferral relief

If you acquire EIS shares then it is possible to defer gains in the previous 36 months until such a time as the EIS shares are disposed of. This has always been a useful relief but is even more useful now that the top rate of capital gains tax has reduced from 28% to 20%. Now taxpayers can use this relief to swap a 28% tax rate for a 20% tax rate for gains that occurred in the last 3 years. This extra 8% will augment the 30% income tax relief that is also often available.

 

Example

In March 2014 John sold an investment property realising a gain of £200,000 and this was subject to capital gains tax at 28%. He therefore paid £56,000 to HMRC through self-assessment.

In May 2016 John wants advice on the benefits of investing £200,000 in a share subscription which qualifies for EIS relief. Provided he holds the shares for the whole of the three year minimum holding period he will receive the following tax benefits meaning that the net cost to John of investing £200,000 is £124,000 :

  • Income Tax relief at 30% thus ‘saving’ £60,000 – assuming that he has paid this amount of tax.
  • CGT deferral – his £56,000 CGT payment is refunded by HMRC and John will only ultimately have to pay £40,000 (a real saving of £16,000).
  • Tax-free gains – any gains he makes on the investment are free of CGT.
  • Loss relief – if his investment loses money he can offset this against Income Tax.
  • Inheritance Tax free – after holding the shares for two years the investment qualifies for Business Property Relief.

The impact of the extra 8% saving is probably not being fully appreciated by many potential EIS investors.

 

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