Although we much prefer to plan in advance of an event, sometimes post-event tax planning is available to mitigate certain tax charges.
Consider the situation in which a client has realised a substantial chargeable gain, perhaps £20M from the disposal of a 100% interest in their privately held trading company. In the first instance, Entrepreneurs’ Relief could be claimed to reduce the tax charge on the first £10M of gains (depending on how much of their lifetime limit has already been used), but what can be done with the remaining chargeable gain, particularly if the client is entrepreneurial and well connected?
Firstly you might look at Enterprise Investment Scheme (EIS) qualifying investments. It can be possible to reinvest up to £1M (or in the case of a knowledge intensive company up to £2M) of the chargeable gains into an EIS qualifying investment to defer the charge to capital gains tax and obtain income tax relief on the investment too. However, it is possible for an EIS qualifying company to attract up to £5M in any one year. Any future gain arising on the EIS qualifying investment would be exempt from CGT, provided that it has been held for at least 3 years, although the chargeable gain held over on the original investment would come back in to charge on disposal of the EIS shares.
It’s possible that even when staying within the EIS qualification rules the client might want to invest more than £1M (or £2M as above) in the EIS investment, as the company appears so strong that even without the tax reliefs it is considered a good investment. Although the excess over the current annual limits (£1M / £2M) would not qualify for additional EIS income tax relief (unless the investment is spread over a number of tax years), or the CGT exemption, the client could nevertheless make additional investments. It should be noted though, as above, that on disposal the original gain held over plus the gain relating to the non-EIS shares would come back into charge.
You can achieve a similar outcome with Social Investment Tax Relief (SITR) qualifying investments and we will explore these in a future article.
Although there are a number of ineligible trades (see our separate EIS article), many entrepreneurial unlisted trading companies are EIS qualifying. We have in a number of instances assisted companies in making advance assurance applications to HMRC for as little as £1,000 plus VAT so that our clients can claim the relief without being disproportionately expensive to the company.
Finally, it should be noted that the deferral relief mentioned above has a time limit. In order to claim the deferral relief there is a time limit of one year prior to the date the original disposal took place or three years from that date. This isn’t as simple as three subsequent tax years, it’s a strict 36 months from the date of disposal of the original investment.
Please seek appropriate professional advice before implementing any tax planning.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.