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Investing in someone else's company after chargeable gain - introduction

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An individual who has a chargeable gain may be able to postpone payment of the capital gains tax by investing in a new or existing business run through someone else's limited company and claiming EIS relief. They may be able to claim both EIS income tax relief and CGT deferral relief.

EIS relief cannot be claimed if the main purpose, or one of the main purposes, is the avoidance of tax. In this context, claiming EIS reliefs is not considered to be the avoidance of tax.

Nor can EIS be claimed on new shares issued in a company if the subscriber already holds shares in the company, unless:

  • the individual has made a 'risk finance investment' before 18 November 2015 (the date the Summer Finance Bill 2015 received Royal Assent), or
  • the individual's shares in the company (excluding founder's shares) were a 'risk finance investment'.

A 'risk finance investment' is an investment under EIS, SEIS or Social Investment Tax Relief.

An investor who is eligible for EIS income tax relief can claim a tax credit of 30% of the amount they subscribe for the EIS shares and may also be able to claim other reliefs.

If a claim is made for EIS CGT deferral relief there is no minimum or maximum amount that can be deferred. And it doesn't matter whether or not the individual or trustee is connected with the company.

Prior to the changes made by Finance Act 2015, a claim could not be made for both Enterprise Investment Scheme (EIS) CGT deferral relief and Entrepreneurs' Relief (ER) in respect of the same gain. The individual had to choose between claiming ER or EIS CGT deferral relief. If, however, ER was claimed, EIS CGT deferral relief could still be claimed on any gains in excess of the available lifetime limit.

For disposals on or after 3 December 2014, investors can benefit from both ER and the deferral of gains reinvested under EIS. This means that gains which are eligible for ER at the time of the original disposal, but which are instead deferred into investments qualifying for EIS, can benefit from ER when the gain is realised, for example when the shares are sold.

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