EIS capital gains: exemption and deferral relief

The two capital gains reliefs work in opposite directions. One removes tax on a future gain you may make from the EIS shares. The other postpones tax on a gain you have already made somewhere else. They can be claimed on the same investment.

This guide is one part of a set covering the whole scheme. The EIS hub lists every guide, from eligibility to claiming.

Disposal relief: exemption on the EIS shares

• You must have claimed income tax relief on the shares and not had it withdrawn.
• The shares must have been held for at least three years from issue, or from the start of trading if later.
• The gain on disposal is then free of capital gains tax, with no upper limit.
• If income tax relief was reduced because your liability was too small, the exemption is restricted in the same proportion.

Deferral relief: postponing another gain

If you make a chargeable gain on any asset - a second property, a shareholding, a business - you can defer the tax by subscribing for EIS shares. The gain is set aside rather than cancelled, and there is no limit on the amount deferred.

The reinvestment window

The EIS shares must be issued in the period beginning one year before and ending three years after the date of the original disposal. Miss that window and the deferral is not available, however good the investment.

When the deferred gain returns

• You dispose of the EIS shares.
• The company loses its qualifying status within the three-year period.
• You become non-UK resident within three years of the share issue, in most cases.
• The shares cease to be eligible for another reason, for example an option arrangement over them.

When it returns, the deferred gain is taxed at the rates applying then, not at the original rates. Some investors chain deferrals by reinvesting again. HMRC sets the position out in helpsheet HS297. The SEIS version, which works quite differently as a reinvestment exemption, is in SEIS capital gains relief.