Capital gains tax deferral allows a UK resident investor to defer capital gains tax (CGT) on a chargeable gain from the sale of any asset, or a gain previously deferred, by investing in new shares of a qualifying unquoted trading company.
However, recent changes to the rules may mean you don’t qualify for the special low entrepreneurs’ relief rate of tax. So what is the most tax efficient way to proceed?
What is Entrepreneurs’ relief?
Entrepreneurs’ relief (ER) reduces the rate of capital gains tax (CGT) on the sale of certain business assets from 20% to 10%. There is a lifetime limit of £10m applied to ER for individual investors. The Finance Bill 2018/19 contained draft legislation outlining changes that affect business owners and their management teams. These changes mean the number of shareholders entitled to claim ER will be reduced and add an extra level of complexity in determining whether claims are valid.
ER is available to:
An entrepreneurs’ relief claim can be made by sole traders or partners selling or giving away whole or a certain part of their business. It is also available to company directors and employees having shareholding of 5% or more.
When you sell an asset for more than it cost you the difference is taxable as a capital gain. The type of asset sold will determine the rate at which you’ll be taxed and any exemptions or reliefs applicable. The standard rates of capital gains tax are 10% and 20%.
Capital gains made on the disposal of any kind of asset can be deferred by reinvestment in EIS companies.This might allow you to achieve a tax rate equivalent to the 10% ER rate and possibly even more.
With an EIS investment, for every £1 you invest, you can defer indefinitely the CGT payable on every £1 of gain you make from the sale of your shares – this is known as capital gains tax deferral relief. The deferred gain will become chargeable when the shares are disposed of (other than by inter-spouse transfer), if the investor or spouse emigrates or the company ceases to qualify. An EIS investment also qualifies for income tax relief which reduces your liability by 30% of the amount you invest.
In general, investors can potentially benefit both from the deferral of gains which can be reinvested under EIS and from ER on those same deferred gains when they come back into charge.
As mentioned above, shares can be transferred to a spouse. This gives you the possibility of reducing your tax bill to almost nothing by taking advantage of both annual CGT exemptions.
Maximising capital gains tax deferral relief
Aside from delaying when you have to pay CGT, deferral relief also gives you the option to spread your EIS investment over multiple years. This means you can use your annual CGT exemption and reduce your tax. For more information on tax when selling shares call us today on 01384 261300. Thomas Nock Martin offers expert tax advice for small business. So, don’t waste any more time searching “chartered accountants near me” or “chartered accountants in Birmingham” because we can help reduce your tax bill today.
If you have found this blog helpful, you may wish to read our previous blog on Self Assessment Tax Returns.