ACCA ATX ^UK Syllabus A2. Chargeable gains - EIS Reinvestment Relief - Notes ^{1 / 4}

Investing in EIS shares

If an individual disposes of any chargeable asset and reinvests in unquoted shares in a qualifying Enterprise Investment Scheme it is possible to defer some (or all) of the gain arising on the asset by claiming EIS Reinvestment Relief. 

In order for EIS Reinvestment Relief to be claimed the individual must be resident in the UK when the gain arises and the reinvestment is made. 

The reinvestment must also occur within a qualifying time period, between 12 months before and up to 36 months after the gain arises. 

The reinvestment must be wholly for cash, in new shares in an unquoted trading company, trading wholly or mainly in the UK. 

The amount of gain to defer by way of EIS Reinvestment Relief can be chosen by the taxpayer in order to utilise losses and the annual exemption, but it cannot exceed the amount invested in unquoted shares. 

The EIS Reinvestment Relief is applied to the gain with any balance not deferred being reduced by the annual exempt amount. 

Any gain deferred is held over until the EIS shares are disposed of when the deferred gain will again crystallise.

Calculating EIS Reinvestment Relief

Sale Proceeds £x
Less: Cost (£x)
Capital Gain

Less:
EIS Reinvestment Relief (£x)
Chargeable gain
Less:
A/E (£x)
Taxable gain

Note, you should work backwards and make sure that your capital gain uses the capital losses and annual exempt amount entirely, and then use the remaining capital gain against the EIS relief.

Sale of EIS Shares

Capital gains implications of sale of EIS shares

First gain
The gain that is held over by the EIS Reinvestment Relief will become chargeable once the EIS shares are sold.

EIS Gain
If investor disposes of the EIS shares after three years = no CGT. 

If he sells them within three years = CGT. 

If he sells them at a loss within or after three years he gets relief for his capital loss. 

The capital loss is realised on the disposal of unquoted shares and can be relieved against total income of the current and previous tax years.

Note - we have already seen this capital loss relief available on the sale of unquoted shares.

Illustration

Grace sold a vase in November 2024 for £275,000 realising a capital gain of £150,000. 

Grace subscribes for qualifying EIS shares in W Ltd, a trading company, the following month at a cost of £268,000. 

She has no other capital transactions in 2024/25 but Grace has £18,600 of capital losses brought forward at 6 April 2024. 

Three years later in 2027/28 Grace sells the EIS shares making a profit of £175,000. 

Assume Grace is a higher rate taxpayer. 

What are the capital gains tax implications on the purchase and on the sale of the EIS shares?

• Solution

  Capital gain on purchase of EIS shares

  Grace can claim relief for any amount up to £150,000, because she has invested more than this in EIS shares.

  However, to claim this full amount will mean that she does not make full use of her annual exempt amount for 2024/25.

  The EIS relief claim should therefore be £128,400 as follows:

  Capital gain £150,000
  Less:
  EIS Reinvestment Relief (£128,400)
  £21,600
  Less:
  Capital loss (£18,600)
  Less:
  A/E (£3,000)
  Capital gain £Nil

• Capital gain on sale of EIS Shares

  When Grace disposes of the EIS shares in 2027/28, the deferred gain of £128,400 on the vase will become chargeable to CGT, but can be reduced by the annual exempt amount of 2027/28. 

  The CGT will be £25,080 (128,400 – 3,000) x 20%, due on 31 January 2029.

  The gain on the EIS shares will be exempt from CGT as they are held for at least three years.