CG64170 - Entrepreneurs’ Relief: Enterprise Investment Scheme and Venture Capital Trust investments before 6th April 2008 – deferred gains coming back into charge after 6th April 2008 - transitional rules

FA2008 Schedule 3 Paragraph 8

FA2008/Sch 3 Para8 provides transitional rules to allow claims for Entrepreneurs’ Relief where: -

• A charge to CGT in respect of all or part of a gain arising to an individual (“the investor”) before 6 April 2008 has been deferred because the investor has invested an equivalent sum in shares qualifying for relief under the Enterprise Investment Scheme (“EIS shares”) or in shares in a Venture Capital Trust (“VCT shares”) - see CG62800 for ‘EIS’ and CG57450 for ‘VCT’, and
• all or part of that gain comes into charge on the occasion of a “chargeable event” (for example, the sale of the EIS or VCT shares) on or after 6 April 2008.

Where a gain has been deferred by reason of an investment in EIS or VCT shares (described as ‘relevant shares’) a pro rata part of the deferred gain is attributed to each share. When a ‘relevant chargeable event’ occurs after 6th April 2008 which relates only to some of the ‘relevant shares’ (for instance, where some but not all of the ‘relevant shares’ are sold), the deferred gain attributed to those shares comes into charge at that time – FA2008/Sch 3 Para8(2).

Entrepreneurs’ Relief may be claimed at the time of the ‘first relevant chargeable event’ (the first ‘relevant chargeable event’ on or after 6 April 2008). This ER claim must be in respect of the whole of the deferred gain that attaches to EIS or VCT shares held by the investor immediately before that chargeable event - FA2008/Sch3/Para8(3).

If the investor has transferred some of the ‘relevant shares’ to his or her spouse or civil partner, so that those shares are not held by the investor at the time of the ‘first relevant chargeable event’, 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 chargeable. If however the shares are returned to the investor before the ‘first relevant chargeable event’, the whole of the gain can qualify for Entrepreneurs’ Relief.

Entrepreneurs’ Relief can be claimed in respect of the deferred gain only if the ‘relevant disposal’ would have been a material disposal of business assets if Entrepreneurs’ Relief had been in force at the time of that disposal - FA2008/Sch 3 Para8(4).

Relevant Disposal

Claims

Calculation

Example

Relevant Disposal

The ‘relevant disposal’ is either the disposal on which the original gain arose or, where the gain that was deferred was itself the deferral of a gain that had already been deferred on an earlier occasion and then comes into charge, the disposal that gave rise to that first gain.

So if a gain that arose on the disposal of an asset in 2001 was deferred by investing in EIS shares, and in 2005 an amount of 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 the shares comprising that later investment, the “relevant disposal” would be the disposal in 2001.

Claims

If an Entrepreneurs’ Relief claim is made under these transitional rules, the gains in respect of which relief is given will be part of the claimant’s maximum amount of £1 million of lifetime gains qualifying for relief, even though part of those gains may not become chargeable until the occurrence of a future chargeable event.

The time limit for claiming Entrepreneurs’ Relief (see CG63970) in respect of a ‘relevant disposal’ is the normal time limit for amending a self-assessment return for the tax year in which the ‘first relevant chargeable event’ takes place, that is by the first anniversary of 31 January after the end of the tax year in question.

Calculation

Entrepreneurs’ Relief is available, where a claim is made, in respect of the amount of the “postponed gain” (the gain deferred on the investment in the relevant shares) attributable to the relevant shares held by the investor immediately before the first relevant chargeable event - FA2008/Sch 3/Para8(7).

The amount of that gain (assuming the conditions of Entrepreneur’s Relief are met) is reduced by 4/9ths under TCGA92/S169N(2) – see CG64125, subject to the lifetime limit of £1 million of gains qualifying for relief.

Where all the relevant shares held by the investor were not disposed of at the time of the ‘first relevant chargeable event’ then on each relevant chargeable event on or after 6 April 2008, a proportion of the total amount calculated above [FA2008/Sch3/Para8(7)] i.e. net of Entrepreneur’s Relief) 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 transaction.

So, if the ‘first relevant chargeable event’ relates to one-third of the relevant shares held immediately before that event, the amount chargeable at that time is one-third of the net gain, computed under FA2008/Sch Para8(7) above. The balance of the net gain will then come into charge on later relevant chargeable events, pro rata to the proportion of the relevant shares held immediately before the first relevant chargeable disposal whose attached gain falls to come into charge at that time.

Example

In May 2004 L disposes her shares in her ‘personal company’. A capital gain of £5,000,000 arose at this time. £1,000,000 of that gain is deferred being used to invest in 1,000 qualifying EIS shares. Three ‘chargeable events’ then take place to bring that £1,000,000 into charge as follows:-