EXPLANATORY NOTE

1. These provisions refine the rules which enable investors to defer chargeable gains under the Enterprise Investment Scheme (EIS) so that the new cumulative taper relief rules introduced by Clause 65 and Schedule 7 can work effectively where an investor makes a part disposal of shares to which deferral relief is attributable. The refinement ensures that a part disposal of the shareholding has effect in all cases to cause a corresponding proportionate amount of the deferred gain to be brought into charge. Schedule 8 takes effect for shares issued after 5 April 1999.

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2. The Clause provides for the Schedule to have effect, and for the amendments made by it to Schedule 5B to the Taxation of Chargeable Gains Act (TCGA) 1992 to have effect in relation to shares issued after 5 April 1999.

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3. Paragraph 1 provides for Schedule 5B to TCGA 1992 to be amended in accordance with paragraphs 2 to 4 of this Schedule. Schedule 5B contains the rules for EIS deferral relief, which enables an investor to defer the charge to capital gains tax on a chargeable gain arising from the disposal of an asset where expenditure on shares comprised in a qualifying investment is set against the gain.

4. Paragraph 2 revises paragraph 4 of Schedule 5B, which takes effect where a chargeable event occurs in relation to any of the shares comprised in the qualifying investment. Such a chargeable event causes an amount of the gain that was deferred to come back into charge, and the effect of the revisions is to set it beyond doubt that the amount in question is determined on an appropriate pro rata basis. This is achieved by attributing a proportionate amount of the deferred gain to each of the shares, so that where, for example, the chargeable event occurs on the disposal of some of those shares, the amount of the deferred gain which comes back into charge is the total amount of the gain which is attributed to the shares disposed of.

5. Paragraph 3 replaces the definition of "relevant shares" in paragraph 19 of Schedule 5B with a definition of "the relevant shares". The definition of this expression is needed in order to identify the shares to which amounts of the deferred gain are attributed so that an equal proportionate amount can be attributed to each of the shares in question. The definition identifies these shares as the shares comprised in the qualifying investment. In any case where the qualifying investment is made before the time at which the original gain arose, the relevant shares are those shares comprised in the qualifying investment which were still held by the investor at that time.

6. The new sub-paragraphs (1B) and (1C) of paragraph 19 of Schedule 5B provide for any bonus shares issued in respect of any of the relevant shares which are held by the investor or his or her spouse to be treated as though they are themselves relevant shares. The new sub-paragraphs (1D) and (1E) apply in circumstances where a new holding company acquires all the shares and securities in the EIS company in exchange for newly issued shares and securities in the new company and paragraph 8 of Schedule 5B has effect to secure continuity of EIS deferral relief for investors. In such circumstances, sub-paragraph (1D) provides that the new shares which are exchanged for the relevant shares become the relevant shares in their place.

7. Paragraph 4 provides for all the remaining references to "relevant shares" in Schedule 5B to be re-cast in terms of references to "the relevant shares".

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8. The background section of the Explanatory Note for Clause 65 and Schedule 7 provides information about the Enterprise Investment Scheme, including EIS deferral relief.

9. The following example illustrates how, following the revisions made by Schedule 8, the EIS deferral relief rules will take effect in a case where a part disposal is made of a holding of shares to which deferral relief is attributable. The Revenue’s interpretation of the current rules is that they also take effect in this way: the revisions made by the Schedule set this beyond doubt.

An individual subscribes £500,000 for 500,000 eligible shares in a qualifying company, and sets £100,000 of that expenditure against a gain of £100,000 ("gain A"), and a further £250,000 of it against a gain of £250,000 ("gain B"). Both these gains are deferred under the EIS.

The deferral relief rules provide that 20 pence of gain A and 50 pence of gain B is attributable to each of the 500,000 shares.

Some time later, the investor disposes of 120,000 of the shares. The effect of this is that £24,000 of gain A is revived, and £60,000 of gain B is revived.