Entrepreneurs' relief and EIS

to 23 June 2010, where amounts were subscribed for Enterprise Investment Schem EIS relief could be claimed to defer a gain after it
had been discounted by the operation of entrepreneurs' relief

### Disposals on or after 23 June 2010 but before 3 December 2014

For disposals on or after 23 June 2010, entrepreneurs'
relief does not discount the gain, but, when successfully claimed applies a
lower rate of tax to the full gain. The interaction of the two regimes therefore
became less favourable. For disposals on or after 23 June 2010 but before 3
December 2014 an individual had to choose between claiming entrepreneurs'
relief and paying tax on the gain at 10 per cent, or deferring the gain under
the EIS rules and paying tax later when the gain came into charge at the
appropriate rate of 18 per cent or 28 per cent, because it was not possible to
claim both entrepreneurs' relief and deferral relief on the same portion of
gain If the gain exceeded the £10
million limit for entrepreneurs' relief it was possible to claim the relief on
the gain up to that limit and to defer the remainder under the EIS rules.

### Original disposal on or after 3 December 2014

Gains realised on or after 3 December
20144 which are eligible for entrepreneurs'
relief, but which are instead deferred into investments which qualify for EIS
or social investment tax relief (SITR, see C1.429), will remain eligible for
entrepreneurs' relief when the deferred gain becomes chargeable

The relief applies if the following conditions are met6—

·         (1)
A chargeable gain (“the first eventual gain”) accrues as a result of a
chargeable event occurring under EIS

·         (2)
The disposal which originally gave rise to the first eventual gain, ie the disposal
for which the gain was deferred, was a relevant business disposal, or where a
gain has been deferred more than once, for instance by reinvestment in more
than one holding of EIS shares or social investment, the underlying disposal
associated with the first deferral was a relevant business disposal. This is to be
determined according to the law applying at the time the original disposal or
underlying disposal was made. A disposal of shares or securities of a
company is a “relevant business disposal. if it is a either a material disposalof business assets or a disposal associated with a relevant material disposal.  A disposal of assets other than shares or securities is a relevant business disp”osal if it is a disposal of a relevant business asset and is either a material disposal of business assets or a disposal associated with a relevant material disposal

·         (3)
The first eventual gain is the first gain treated as accruing in respect of a
particular deferred gain. This means that where part of a deferred gain has
previously accrued without a claim to entrepreneurs' relief being mae in
respect of it, it is not possible to claim relief under these provisions when
another part of the same gain subsequently accrues.

The relief must be claimed by the individual who made the
original disposal by the first anniversary of 31 January following the end of
the tax year in which the first eventual gain accrues

Where the relief applies, the first
eventual gain is treated as a section 169N(1) gain and is eligible for
entrepreneurs' relief , subject to the relevant applicable
lifetime limit, and to the extent that the relief is given in respect of it,
the first eventual gain is not treated as a gain for other purposes of TCGA 199213. Where the first eventual gain does
not represent the whole of the deferred gain, the rest of the deferred gain,
when it is finally treated as accruing, is also eligible for entrepreneurs'
relief without the need for further claims to the relief on the later accrual
or accruals.

Where the original disposal was an associated disposal the disposal relating to the first eventual gain is also
treated as an associated disposal. When deciding whether the associated
disposal rules apply, the conditions in section 169P(4) (see C3.1305) are to be applied to the original disposal.

### Original disposal prior to 6 April 2008

Where, prior to 6 April 2008 an individual has disposed of
his personal trading company and, rather than claim business asset taper relief
on the gain, deferred it under the EIS or VCT regimes, it may be possible to
claim entrepreneur's relief on the deferred gain arising on disposal of the EIS
or VCT shares. In order to determine if entrepreneurs' relief would apply to
the deferred gain on disposal of the EIS or VCT shares, it is necessary to
trace back to the event giving rise to the original gain, and determine
whether, if entrepreneurs' relief was in force at that time, it could have been
claimed in respect of that gain.

The transitional provisions apply
where a charge to capital gains tax in respect of a gain arising to an
individual (the investor) before 6 April 2008 has been deferred on the
investment by him of a corresponding sum in “relevant shares”, being shares
qualifying for relief under the Enterprise Investment Scheme (EIS) or shares in
a Venture Capital Trust (VCT) (see Division
C3.11),
and all or part of that gain comes into charge on the occasion of a chargeable
event on or after 6 April 2008. When the deferred gain comes into charge the
investor can claim entrepreneurs' relief if the disposal giving rise to the
deferred gain would had qualified for relief, had it been available at the time
the assets were disposed of giving rise to the gain which was deferred14.

The provisions apply where there is a
relevant chargeable event and the “original gain” would, apart from TCGA 1992 Sch 5B (EIS) or Sch 5C (VCT), have occurred
before 6 April 200815. “Relevant chargeable event” means a
chargeable event under Sch 5B para 3(1) or Sch 5C para 3(1) which occurs on or
after 6 April 2008 in relation to any of the relevant shares held by the
investor immediately before the first relevant chargeable event16. “First relevant chargeable event”
means the earliest relevant chargeable event17. The shares must be held by the investor immediately before
the first relevant chargeable event on or after 6 April 2008. If the investor
has transferred some of the relevant shares to his spouse or civil partner, no
entrepreneurs' relief can be claimed in respect of the gain attaching to those
shares, even if they are subsequently returned to the investor before that gain
becomes chargeable18.

The following provisions apply if the “relevant disposal”
would have been a material disposal of business assets had entrepreneurs'
relief been available and applied to it, even though made before 6 April 2008
and a claim for relief is made on or before the first anniversary of 31 January
following the tax year in which the first relevant chargeable event occurs19.

The “relevant disposal  means either the disposal on which
the original gain arose (the original gain disposal) or, where the original gain would
have accrued by virtue of a chargeable event in relation to reinvestment
rollover relief (which was replaced by EIS deferral
for investments made after 5 April 1998), EIS or
Venture Capital Trusts2(the
original gain event) it is the “relevant underlying disposal”, that is the
disposal that gave rise to the first gain to be deferred by EIS or VCT  For example, if a gain which arose
on the disposal of an asset in 2001 was deferred by investing in EIS shares,
and in 2005 an amount of the gain treated as arising on a chargeable event in
relation to those EIS shares was itself deferred against a further investment
in EIS shares, then on the occasion of a chargeable event on or after 6 April
2008 in relation to shares comprising the later investment, the “relevant
underlying disposal” is the disposal in 2001 which was the original source of
the deferred gain. The “original gain event” would be the chargeable event in
2005 which resulted in the new deferral. The amount treated as accruing on the relevant chargeable event in
respect of the original gain event or the original gain disposal is the amount
that would be arrived at under section 169N(1) if the relevant chargeable event
were a qualifying business disposal and the relevant proportion of the
postponed gain constituted the section 169N(1) gain (see C3.1307). The “relevant proportion” means
the proportion of the relevant shares which is held by the investor immediately
before the first relevant chargeable event

Where all the relevant shares held by the
investor are not disposed of at the time of the first relevant chargeable event
on or after 6 April 2008, a proportion of the amount calculated above comes
into charge. That proportion is equivalent to the proportion of the relevant shares
held by the investor immediately before the time of the first relevant
chargeable event that are the subject of the relevant transaction29.
Therefore, if on the occasion of the first relevant chargeable event, one third
of the relevant shares held immediately before the first relevant chargeable
event are the subject of that chargeable event, the amount chargeable at that
time is one third of the net gain computed as outlined above under section
169N. The remainder of the net gain will come into charge on later relevant
chargeable events, pro rata to the proportion of the relevant shares held
immediately before the first relevant chargeable event whose attached gain
falls to come into charge at that time30.