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Deferring a Capital Gain and EIS

Newsletter issue - August 2010.

We are now in a new regime for Capital Gains Tax where the total of your gains and your taxable income for the year influences the rate of Capital Gains Tax (CGT) you pay. This means you could pay CGT at 28% in tax years where your income and gains are high, but only 18% on gains in years where your income is low.

If you have made a gain this year that will be taxed at 28% you could defer it to a later tax year when you might pay tax at 18%. Alternatively the deferred gain may be taxed at 0% as it may be covered by your annual exemption in the future period.

One way to defer any capital gain is by subscribing for Enterprise Investment Scheme (EIS) shares. The shares must be subscribed for in the period that starts one year before the date you made the gain and ending three years after making the gain.

You only need to reinvest the amount of the gain you want to defer, not the full net proceeds from your disposal, or the full amount of the gain. You can leave some of the gain in charge in the current tax year if that part carries CGT at 18%, or it is covered by your annual exemption.

The deferred gain comes back into charge to CGT when you dispose of the EIS shares, and this may be done gradually over many tax years. This spreads out the gain, so only small parts are taxed in each year, and you can therefore avoid the 28% rate of CGT.

One drawback is that you must pay any CGT due for 2010/11 by 31 January 2012, which is well within the period in which you can to subscribe for EIS shares. You may need to pay the 2010/11 CGT on time, then reclaim the tax once you have received your EIS shares and your deferral claim has been processed.

Do be aware that EIS shares are risky investments and they can only be issued by unquoted companies.