ACCA Advanced Taxation (ATX) Practice Exam

In CGT computation, when is EIS/SEIS reinvestment relief subtracted from the net chargeable gains?

1. After AEA

2. Before AEA

3. At the same time as AEA

4. Only if agreed with HMRC

The correct answer is: Before AEA

The EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) reinvestment relief is specifically designed to encourage investments in qualifying companies by allowing investors to defer or reduce their capital gains tax liability. This relief is applied before deducting the Annual Exempt Amount (AEA) from net chargeable gains. The reason for subtracting EIS/SEIS reinvestment relief before AEA is rooted in the tax calculation process. The AEA is a tax-free allowance given to individuals that allows them to realize a certain amount of gains without incurring tax. By applying the reinvestment relief first, one can lower the total chargeable gains that remain after the relief, thus maximizing the benefit from the AEA. This approach ensures that the relief effectively reduces the chargeable gains more significantly relative to the allowance, allowing individuals to minimize their overall tax liability. This methodology aligns with the principle of measuring the gains subject to tax after considering all relevant reliefs and allowances, ensuring compliance with HMRC’s regulatory framework for capital gains taxation. In this context, any deductions made prior to applying the AEA help in accurately establishing the taxable gain that reflects the taxpayer's situation after taking advantage of available tax reliefs.