ACCA Advanced Taxation (ATX) Practice Exam

Under EIS reinvestment relief, when does the amount deferred become exempt?

1. After 1 year

2. After 2 years

3. After 3 years

4. After 5 years

The correct answer is: After 3 years

In the context of the Enterprise Investment Scheme (EIS) in the UK, reinvestment relief allows individuals to defer capital gains tax on the sale of an asset when they reinvest the proceeds into qualifying EIS shares. The key aspect of this relief is understanding when the deferred gains become exempt from tax. The deferred capital gains become exempt after a holding period of three years from the date the shares are issued. During this period, the investor must hold the EIS shares to retain the benefit of the tax relief. If the shares are disposed of before the end of the three-year period, the gains that were previously deferred would become chargeable and may be taxed. This three-year requirement underscores the EIS's intention to encourage long-term investment into smaller, higher-risk trading companies, providing not only tax relief on gains but also promoting growth in entrepreneurial ventures. Therefore, it is essential for investors to be aware of this timeline when considering their investment strategy under the EIS framework.