Offset Capital Gains with EIS, SEIS reinvestment

danby22

I have a capital gain from disposal of shares and a summary of my situation is below.  I'd like to offset the Capital Gains liability by investing into EIS / SEIS schemes and would like to confirm my understanding of how the taxation works is correct.
Am also interested in knowing how these deferred CG liabilities transform in the future and have put together a few questions (Q1 / Q2 / Q3).
Appreciate all inputs and please let me know if I can clarify any further on the below. 

HappyHarry

Before I start, you should be aware that EISs and SEISs are very high risk, and you run a substantial risk of losing your capital entirely. Though if you are wealthy, you can offset those losses against other gains in the tax year. If you are not overly wealthy, then putting £7,000 at risk to save a £1,200 tax bill could be considered foolish.

Anyway, to your questions;
1. Correct
2. The £2,000 SEIS investment reduces your CG by £1,000, so your total CG for 2019/20 would now be £17,000. It can't be offset against other gains, though any gains the SEIS itself makes would be exempt from CGT.
3. It is the gain that is deferred, not the tax liability. Usually, the plan is to defer the gains to such a year that you no longer have any other gains. E.g. if you continued the EIS investments until, say 2023/24 and then sold them, and you had no other gains that tax year, then the deferred gain would fall within your CGT allowance, and there would be no CGT to pay.

danby22

Thanks for that Harry.
Advice regarding the risk is well received.  I try to go after companies that I have good confidence with, else I break up the investment into small chunks that I can afford to lose (considering I get back more than 50% of the money invested via the tax benefits).

Your answers for 1 & 3 clarifies my queries.  Thanks for that.

For Q2,

• The strategy I was planning for was to invest 7K into 4 EIS startups & 1 SEIS startup.  Collectively I expect this to offset the 6K CG - Are you stating it doesn't work this way?
• Also what happens to the CG if the reinvestment into the EIS/SEIS company becomes 0 value on a future date?  Does the deferred CG become accountable that year?

Cheers!

bowlhead99

danby22 said:

For Q2,

• The strategy I was planning for was to invest 7K into 4 EIS startups & 1 SEIS startup.  Collectively I expect this to offset the 6K CG - Are you stating it doesn't work this way?
• Also what happens to the CG if the reinvestment into the EIS/SEIS company becomes 0 value on a future date?  Does the deferred CG become accountable that year?

Cheers!

a) if you invest £2k into SEIS claiming reinvestment relief at 50%, you will essentially be saying that 50% (£1k) of your total £18k gain does not exist. Your total unrelieved gain for the year will be £17k instead of £18k.

Then when you invest another £5k of that £17k gain into EIS companies claiming deferral relief, your unrelieved gain will fall to £12k, and we know that £12k will be covered by your annual exemption. So, £0k will actually be chargeable to tax in the current year.

https://www.gov.uk/government/publications/seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-hs393-self-assessment-helpsheet/hs393-seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-2019#capital-gains-tax-reliefs

b) if your EIS shares are disposed of (or treated as disposed (negligible value claim)), or no longer qualify for income tax relief, you're right that a gain that was deferred against them will come back into play. You can't continue to say the gain is deferred against EIS shares if those EIS shares are sold, treated as sold (nil value claim) or are no longer EIS qualifying such that the income tax relief on them was withdrawn.

In that situation the gain that was deferred from this year still exists, and is chargeable to tax that year. You may not actually have any net gains in excess of the exemption that year of course.

danby22

That's great, thanks for the replies both of you.