Can A SEIS Investment Be Used To Defer CGT?
Capital Gains Tax (CGT) is a tax liability that becomes payable when you make a gain from selling or disposing of an asset that has increased in value. CGT is paid for the tax year in which you dispose of the asset.
Capital gains made on the disposal of an asset can be deferred by reinvestment in the Enterprise Investment Scheme (EIS) but not in the Seed Enterprise Investment Scheme (SEIS). This is known as deferral relief. The EIS investment must be in newly issued ordinary shares which are subscribed for in cash. Capital Gains can be deferred if they were made on disposal of an asset not more than three years before nor more than one year after, the EIS investment is made.
Deferral relief is not dependent on Income Tax Relief. It is possible to invest more than the £1 million applicable to EIS Income Tax Relief and get deferral relief on the total investment.
Deferral relief is also available where the investor does not meet the strict conditions of being unconnected with the EIS company, so they can, for example, be the sole shareholder of the company.
Any deferred gains will become taxable under the following circumstances:
- An EIS company ceases to qualify for any reason in the three years following the issue of the shares, or in the three years from the commencement of trade, whichever is later.
- The EIS shares are sold or disposed of (unless to a spouse).
- The EIS shares cease to be eligible shares within three years of issue or three years of commencement of trade, whichever is the later.
- The EIS shares are exchanged for non-qualifying shares.
- The investor becomes a non-UK resident within three years of the issue of shares or three years of commencement of trade, whichever is the later (unless going to work full-time offshore for three years or less).
- The investor receives certain prohibited benefits in the period beginning one year before and ending three years after the issue of the shares or the commencement of trade, whichever is the later. These prohibited benefits can include directors’ remuneration, rents, loans or interest, which HMRC regards as excessive.
Although SEIS investment cannot be used to defer CGT, there are however 2 Capital Gains Tax Reliefs available within the Seed Enterprise Investment Scheme, reinvestment relief and disposal relief.
Reinvestment relief is available when gains arising on the disposal of any asset are reinvested in shares in a company on which SEIS Income Tax relief is received. This relief enables an individual that has disposed of an asset to treat a maximum of 50% of the gain as exempt from CGT. The maximum amount of reinvestment relief that can be claimed is £50,000. The SEIS investment can take place before the disposal of the asset, providing that the disposal and the investment both happen in the same year and you still hold the SEIS shares at the time the gain is made.
Disposal relief enables the disposal of SEIS (and EIS) shares without the payment of Capital Gains Tax.
The following conditions must be met for disposal relief:
- You must have received SEIS/EIS Income Tax Relief in full on the whole of your subscription for the SEIS/EIS shares and none of the Income Tax Relief must have been withdrawn.
- You must have held the SEIS/EIS shares for at least 3 years.
Disposal relief is not available on any gain arising on a disposal within three years of the date the SEIS/EIS shares were issued. If you sell SEIS/EIS shares within three years of the date they were issued (unless the sale is to your spouse or civil partner), SEIS/EIS Income Tax relief for those you sell will be wholly or partly withdrawn. Therefore, if you make a gain on the disposal, it will be chargeable to CGT.
In conclusion, EIS investment can be used to defer CGT but SEIS investment cannot. However; there two CGT reliefs under SEIS, reinvestment relief and disposal relief.