VCM23010 - EIS: deferral relief: shares issued on or after 6 April 1998: introduction and qualifying gains

TCGA92/SCH5B/PARA1 (1)

FA98/S74 and FA98/SCH13 introduced significant changes to the existing rules for CGT deferral relief within the EIS. The new rules apply where the shares are issued on or after 6 April 1998.

Qualifying gains

The relief can be claimed against any chargeable gain arising on the disposal of any asset by a taxpayer if a qualifying investment, see VCM23020, is acquired by them at a qualifying time, see VCM23030, on or after 6 April 1998. The chargeable gain is the gain after any mandatory deductions and reliefs which have to be claimed. However, the gain to be invested is that before the deduction of taper relief. Any taper relief is deducted when the gain comes back into charge following a chargeable event, see VCM23110. Taper relief does not apply to gains accruing or treated as accruing after 5 April 2008.

Deferral relief can be claimed when a gain previously deferred under the EIS (or under the VCT scheme in respect of shares issued on or before 5 April 2004, see VCM50000 onwards), is brought back into charge. Also, under the new rules, a gain accruing as a result of a claw back of reinvestment relief, see CG62200 onwards, could be the subject of a deferral relief claim. The investor may claim deferral relief on part of his or her gain.

Gains accruing on or after 6 April 2016

The rate of capital gains tax charged on gains which accrue on or after 6 April 2016 depends on whether those gains are “upper rate gains”: for an explanation of this term and the applicable rates, see the capital gains manual, CG21000.

If an upper rate gain is relieved under EIS deferral relief, it retains the characteristics which would have caused it to be an upper rate gain had it accrued at the time of the original disposal. So when it is treated as accruing on the occurrence of a chargeable event it remains an upper rate gain and is taxed accordingly.

This treatment follows from the nature of the relief: it is a deferral of the accrual of a specific gain, rather than a rolling-over of an amount of a gain into the allowable cost of another asset, or an exemption applied to a gain and the substitution of another gain. It is also worth noting that the chargeable event which triggers the accrual of the deferred gain may not involve a new disposal, so it would be difficult to argue that the deferred gain in fact arises from any disposal other than that of the ‘original’ asset.