Capital gains tax relief on sale of shares

EIS

As long as income tax relief was given on shares subscribed for and not withdrawn then those shares will be free of CGT when ultimately sold. It follows that the company must carry on its qualifying activity for three years from the date of acquisition of the shares, or three years from commencement of trading, if later. After that time it can carry on non-qualifying activities, including carrying on an investment business, and the shares will still be free of CGT when sold.

In cases where a disposal of EIS shares does not meet the tests for CGT exemption (as EIS income tax relief has been withdrawn or not available in the first place), the relevant EIS shares will be subject to CGT on a disposal.

The current rates of CGT that apply to an individual for disposals of interests in shares are:

  • 10% for gains qualifying for entrepreneurs’ relief (ER), including the extension to ER for the new investors’ tax relief to be introduced in Finance Act 2016, within the lifetime allowances (but see below on interaction with ER);
  • 18% to the extent that there is any income tax basic rate band not being used against income (or ‘allocated’ against gains taxed at the ER 10% rate); and
  • 20% for the remaining gains.
  • ER is subject to a lifetime allowance, which currently stands at £10m per individual. The new investors’ relief will have its own £10m lifetime allowance for ER purposes.

SEIS

Similar to the rules above for EIS, gains on disposals of SEIS shares are exempt from CGT if held for at least three years from the date of issue.

VCT

Disposals of VCT shares will be free of CGT as long as the VCT qualified when the shares were bought and sold and provided the amount invested did not exceed the permitted annual maximum of £200,000. Relief is available on shares that were subscribed for or purchased ‘second-hand’.

EIS, SEIS and VCT investments provide capital for smaller unquoted companies. This type of investment is generally considered to be higher risk than mainstream investments, so it is important to assess the investment risks as well as the possible tax breaks.

An overview of the tax incentives.

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Adrian Walton

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