ACCA Advanced Taxation (ATX) Practice Exam

What is the main purpose of the EIS and SEIS reinvestment relief?

1. To support new business startups

2. To mitigate inheritance tax liabilities

3. To allow offsetting of losses against income

4. To provide relief from Capital Gains Tax

The correct answer is: To provide relief from Capital Gains Tax

The main purpose of the EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) reinvestment relief is to provide relief from Capital Gains Tax (CGT). These schemes are designed to encourage investment in new and high-risk businesses by offering investors significant tax advantages. When an individual disposes of an asset and realizes a capital gain, that gain is typically subject to Capital Gains Tax. However, if the individual then reinvests that gain into qualifying companies under the EIS or SEIS, they can defer the capital gains tax liability on that gain. Essentially, this mechanism not only promotes investment in startups and smaller business ventures but also supports the government’s goal of driving economic growth by enhancing the attractiveness of such investments through tax incentives. Through this relief, investors can postpone their tax liabilities until they dispose of the EIS or SEIS shares, creating an appealing investment environment. This aligns with the government’s efforts to stimulate entrepreneurial activity and support new business startups, although that is not the direct intention of the reinvestment relief itself.