CG64171 - Business Asset Disposal Relief: Enterprise Investment Scheme and Venture Capital Trust investments before 6th April 2008 - deferred gains coming back into charge after 6th April 2008 - transitional rules - examples
Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.
Example 1: a ‘first relevant chargeable event’ before 23 June 2010
Example 2: a “first relevant chargeable event” on or after 23 June 2010
Example 1: a ‘first relevant chargeable event’ before 23 June 2010
In May 2004 L disposed of shares in her ‘personal company’. A capital gain of £10,000,000 arose at this time. £6,000,000 of that gain is deferred being used to invest in 1,000 qualifying EIS shares. Three ‘chargeable events’ then take place to bring that £6,000,000 into charge as follows:-
- On the 31st August 2007 - 100 EIS shares sold = £600,000 gain
- On the 10th April 2009 a further 300 EIS shares are sold, and finally
- On 30th April 2010 the remaining 600 EIS shares are sold.
| - | Amount |
|---|---|
| Total gain | £6,000,000 |
| First Event on 31st August 2007 - 100 EIS shares were sold and upon this event the amount of the ‘relevant gain’ will come back into charge and be reduced by any taper relief due. No Business Asset Disposal Relief is due at this time. This proportion of the deferred is £6,000,000 | - |
| Gain will be 100/1,000 = | £600,000 |
| Deferred gain remaining = | £5,400,000 |
| Second Event on 10th April 2009- Taper relief has now been withdrawn but Business Asset Disposal Relief may be considered on the assumption that Business Asset Disposal Relief existed at the time of the disposal of the original shares in May 2004 and if L makes a claim | - |
| This is the ‘first relevant event’. 900 relevant shares remain before this event out of the 1000 total. The deferred gain remaining (£6,000,000 x 900/1,000) = £5,400,000 | - |
| Provided Business Asset Disposal Relief up to the full lifetime limit is available then £1,000,000 is reduced by 4/9 giving a deferred gain after Business Asset Disposal Relief of = | £555,555 |
| This is a separate gain to that part of the deferred gain which is not reduced by the application of Business Asset Disposal Relief which is £4,400,000 | - |
| But because not all of the relevant shares are the subject of this chargeable event only a proportion corresponding to the 300 shares disposed of will become a chargeable gain in 2009-10 i.e. 300/900 x £555,555 = | £185,185 |
| This leaves a gain remaining net of Business Asset Disposal Relief of £370,370 | - |
| In addition 3/9 of the part of the deferred gain not subject to the Business Asset Disposal Relief will be attributable to this disposal of shares. 3/9 of £4,400,000 [Paragraph 4(1)(b) Schedule 5B refers] | £1,466,667 |
| Total chargeable gain, taxable at the 18% CGT rate | £1,651,852 |
| Capital Gains Tax | £297,333.36 |
| Third Event on 30th April 2010- 600 of the 900 shares held immediately before the ‘first relevant event’ are sold so 600/900 of the £555,555 gain resulting from the Business Asset Disposal Relief claim accrues = | £370,370 |
| In addition 6/9 of the part of the deferred gain was not subject to the Business Asset Disposal Relief claim will be attributable to this disposal of shares. 6/9 of £4,400,000 = | £2,933,333 |
| Total chargeable gain, taxable at the 18% CGT rate | £3,303,703 |
| Capital Gains Tax | £594,666.54 |
| Note that although this final disposal took place at a time the lifetime limit was £2,000,000, that revised limit does not apply to the disposal | - |
Example 2: a “first relevant chargeable event” on or after 23 June 2010
This is similar to the example above. In May 2004 L disposed of shares in her ‘personal company’. A capital gain of £10,000,000 arose at this time. £6,000,000 of that gain is deferred being used to invest in 1,000 qualifying EIS shares. Three ‘chargeable events’ then take place to bring that £6,000,000 into charge as follows:-
- On the 31st August 2007 - 100 EIS shares sold = £600,000 gain.
- On the 20th August 2010 a further 300 EIS shares are sold, and finally,
- On 17th July 2011 the remaining 600 EIS shares are sold.
| - | Amount |
|---|---|
| Total gain | £6,000,000 |
| First Event on 31st August 2007 - 100 EIS shares were sold and upon this event the amount of the ‘relevant gain’ will come back into charge and be reduced by any taper relief due. No Business Asset Disposal Relief is due at this time This proportion of the deferred is £1,000,000 | - |
| Gain will be 100/1,000 = | £600,000 |
| Deferred gain remaining | £5,400,000 |
| Second Event on 20th August 2010 - Taper relief has now been withdrawn but Business Asset Disposal Relief may be considered on the assumption that Business Asset Disposal Relief existed at the time of the disposal of the original shares in May 2004 and if L makes a claim | - |
| This is the ‘first relevant event’. 900 relevant shares remain before this event out of the 1000 total. The proportion of the deferred is £6,000,000. Gain will be 900/1,000 = £5,400,000 | - |
| L has previously made claims that have used £1,500,000 of her lifetime limit for Business Asset Disposal Relief (unrelated to the EIS shares) | - |
| The effect of making a claim in respect of the deferred gain is to create a separate gain of £3,500,000 (the balance of her lifetime limit) that is chargeable at the 10% rate | - |
| This is a separate gain to that part of the deferred gain which is not reduced by the application of Business Asset Disposal Relief which is £1,900,000 | - |
| But because not all of the relevant shares are the subject of this legislation first apportion the overall deferred gain that is subject to the claim (before any restriction under the lifetime limit) by reference to the 300 shares disposed of and the number of shares held immediately before that disposal: 300/900 x £5,400,000 = | £1,800,000 |
| This is less than the amount of gain qualifying for Business Asset Disposal Relief so is all charged at the 10% Business Asset Disposal Relief rate | £180,000 |
| Therefore £1,700,000 (£3,500,000 - £1,800,000) of the Business Asset Disposal Relief gain remains deferred together with the balance of deferred gain of £1,900,000 | - |
| Third Event on 17th July 2011 - 600 of the 900 shares held immediately before the ‘first relevant event’ are sold so the remaining 600/900 of the£5,400,000 gains subject to Business Asset Disposal Relief claim accrues = | £3,600,000 |
| Of this amount, £1,700,000 represents the gain qualifying for Business Asset Disposal Relief | £1,700,000 |
| Tax at the 10% Business Asset Disposal Relief rate | £170,000 |
| The balance is charged at L’s normal CGT rate of 28% | £1,900,000 |
| Tax at (say) the 28% CGT rate | £532,000 |
| Total Capital Gains Tax | £702,000 |
These examples ignore the availability of the Annual Exempt Amount.