EIS Scheme & CGT Reliefs – How Does it Work?

03/12/2022 - 16 minutes read

EIS Scheme & CGT reliefs are frequently asked questions by Investors who want to understand the capital gains aspects of the Enterprise Investment Scheme (EIS).

EIS Scheme & CGT reliefs can be split into 2 categories:

  • Disposal Relief, where shares in an EIS company are disposed of and certain criteria are met
  • Deferral Relief, where a gain arising on a disposal of any asset is deferred against a qualifying investment in shares issued by a company that meets specified requirements
EIS Scheme & CGT reliefs

EIS Scheme & CGT Reliefs – How Does it Work?

What is Disposal Relief?

If Disposal Relief is due you will not have to pay CGT on a gain on your disposal of the EIS shares. You will meet the conditions if you’ve:

  • – held the EIS shares for at least 3 years (note that if you acquired EIS shares in a company that did not start to trade until a later date, the 3 years do not start until that later date)
  • – received EIS Income Tax relief in full on the whole of your subscription(s) for the EIS shares and none of the Income Tax relief must have been withdrawn

EIS Income Tax relief is given for subscriptions for shares in unlisted companies which meet certain conditions, explained in the Enterprise Investment Scheme — introduction. EIS income tax relief is applied to your income tax liability. Personal allowances and other reliefs are deducted first in establishing your liability.

Disposal Relief is restricted – therefore part of your gain may be chargeable to CGT — if either:

  • – Income Tax relief is not given on the full amount of the subscription for EIS shares.
  • – The amount of Income Tax relief is reduced or withdrawn in full.

There is no restriction if, provided some Income Tax relief is given, the only reason full Income Tax relief cannot be given is that the claim reduces the investor’s Income Tax liability to nil.

You may not be able to obtain Income Tax relief if your total income is too low or your income tax liability is reduced to nil by allowances or other reliefs. If you do not obtain any Income Tax relief on a subscription for shares in an EIS company there is no CGT exemption for those shares. You may however be able to use your CGT annual exempt amount (AEA), £12,300 for 2021 to 2022, to cover all or part of your gain.

For further information, go to the Venture Capital Schemes Manual (VCM20040) or you can ask HMRC or your tax adviser for help.

When is Disposal Relief not due?

There is no Disposal Relief on any gain arising on a disposal within 3 years of the date the EIS shares were issued to you. You can find the actual date of issue on the EIS certificate which the company sent you.

If you sell EIS shares within 3 years of the date they were issued (and the sale is not to your spouse or civil partner):

  • – Income Tax relief in respect of those you sell will be wholly or partly withdrawn
  • – any gain on the disposal will be chargeable to CGT

Disposal Relief is not available against a deferred gain that is revived on a disposal of the EIS shares or some other event.

If you make a loss on a disposal of your EIS shares at any time you can set this loss against your chargeable gains or you may be able to set it against your income. In computing the loss, you must reduce the cost of your shares by the amount of any Income Tax relief given and not withdrawn.

What are the main rules for calculating gains or losses on EIS shares?

The normal capital gains rules apply but with exceptions. The main exceptions are that there are special share identification rules. You identify disposals out of a holding of shares which includes shares to which Income Tax relief is attributable on a first-in, first-out basis.

Shares disposed of are identified first against the earliest acquisition. But this does not help where you are disposing of some shares from a holding which includes shares acquired on the same day, which have different reliefs attributable to them.

For the share identification rules for this situation, go to the Venture Capital Schemes Manual (VCM16020) or you can ask HMRC or your tax adviser for help.

Do you need to disclose any gain arising from a disposal of the EIS shares on your tax return?

You must give details of the disposal on the Capital Gains Tax summary pages of your tax return if either of the following were more than the figures shown on page TRG 3 of the Tax Return Guide:

  • The total value of the EIS shares and any other assets you disposed of in the tax year.
  • Your total chargeable gains.

What is Deferral Relief?

When you dispose of an asset and make a gain you usually pay CGT for the tax year in which you dispose of the asset. Deferral Relief lets you treat the gain as not arising until some future date if you acquire EIS shares.

If you make a claim to defer a gain, the gain may be charged to CGT in a later tax year, usually when you dispose of the EIS shares. If you obtain Income Tax relief on an acquisition of shares, then you can claim Deferral Relief as well. You do not have to obtain Income Tax relief to claim Deferral Relief.

To obtain full Deferral Relief you must invest an amount at least equal to the chargeable gain.

EIS Scheme & CGT reliefs – Which gains you can defer?

You can defer any gain which arises on your disposal of an asset. You can also claim Deferral Relief when a gain, previously deferred under the EIS Reinvestment Relief or the Venture Capital Trust scheme, is revived. (Revived means the gain is brought back into charge to CGT.)

Which EIS shares qualify for Deferral Relief?

You can claim Deferral Relief if you subscribe for and are issued qualifying EIS shares. If your EIS shares were issued before the date on which the gain you claim to defer arose, you must still hold them at that date.

What are the time limits for subscribing for EIS shares to obtain Deferral Relief?

The EIS shares you subscribe for must be issued to you in the period beginning one year before and ending three years after, the date of the disposal for which you wish to claim relief. HMRC has the discretion to extend these time limits and can explain the circumstances in which they will do this.

Who can claim Deferral Relief?

You can claim relief if you’re an individual resident of the United Kingdom (UK). You cannot claim relief if you are treated by double taxation arrangements as a resident elsewhere, so that (ignoring any Disposal Relief) you would not be liable to UK CGT on any gain from the EIS shares. The trustees of certain settlements may also claim relief. Ask HMRC for details.

How do you claim Deferral Relief?

You must complete the claim form attached to the EIS3 certificate you should receive from the company you’ve invested in, and attach the form to the Capital Gains Tax summary pages of your tax return.

If the gains against which you are claiming Deferral Relief arose in the tax year to which this return relates, please put ‘OTH’ in box 36 on page CG 2.

If you’re making more than one type of claim, please put ‘MUL’ in box 36. Provide details of the claim in the ‘Any other information’ box, box 54, or in your computation, providing a clear statement that you’re claiming EIS Deferral Relief.

How much Deferral Relief can you claim?

There’s no upper limit on the amount you can invest in EIS shares in a year, though the amount you can invest in a single company is limited. You may claim less than the maximum Deferral Relief, for example, if you want to use your annual exempt amount to cover part of your gains.

What is the time limit for claiming Deferral Relief?

You cannot make a claim before you have received the relevant EIS3 certificate. The latest date for making a claim is 5 years after the first 31 January following the end of the tax year in which the shares were issued.

When is the deferred gain revived?

The whole (or part) of the deferred gain is revived when there is a chargeable event unless you die before a chargeable event occurs. There’s a chargeable event if:

  • you dispose of your EIS shares (unless the disposal is to your spouse or civil partner whilst living together, in which case the event occurs when that person disposes of the shares)
  • you (or your spouse or civil partner to whom you have transferred your shares) cease to be resident in the UK, if this happens within 3 years from the time the shares were issued – but this does not apply if whichever of you holds the shares takes up employment outside the UK and becomes resident again within 3 years, without disposing of any of the shares in the meantime
  • the shares cease or are treated as ceasing to be eligible shares, for example, because the company is prevented from being a qualifying company

How do you report the revived gain?

You must give details on page CG 2 of the Capital Gains Tax summary pages. Please also explain in the ‘Any other information’ box, box 54, on page CG 3, or in your supporting computations, that the whole (or part) of the deferred gain to which the EIS Deferral Relief has been claimed is revived.

Guidance on Entrepreneurs’ Relief and deferred gains can be found in Helpsheet 275 Entrepreneurs’ Relief and in the Capital Gains Tax Manual.

You can deduct the AEA for the tax year in which the deferred gain is revived to cover the whole or part of that deferred gain.

How much of the deferred gain is revived?

The whole of any deferred gain is revived if:

  • – you dispose of all your EIS shares — see Example 7
  • – the chargeable event is not a disposal of your EIS shares (for example, if within 3 years from the time the shares were issued, you emigrate intending to stay outside the UK permanently)

EIS Scheme & CGT reliefs – What are the identification rules?

You identify disposals out of a holding which includes shares to which Deferral Relief is attributable on a first-in, first-out basis. Shares disposed of are identified first against the earliest acquisition. When shares were acquired on the same day, and the only relief involved is Deferral Relief, you identify disposals first against shares acquired which don’t have Deferral Relief attributable to them.

For more information on where shares are acquired on the same day and reliefs other than Deferral Relief are attributable to them, go to the Venture Capital Schemes Manual (VCM16020) or ask us or your tax adviser for help.

What happens if the EIS company makes a bonus issue of shares?

Any Deferral Relief continues and is apportioned between the original shares and the bonus shares related to them.

What happens if the EIS company makes a rights issue of shares?

If you subscribe for the rights shares this is treated as a separate subscription for the purposes of the Capital Gains Tax Reliefs. Any Deferral Relief continues but relates only to the shares on which it was originally given.

How can MCL Accountants help?

Contact MCL Accountants on 01702 593 029 if you would like further information about EIS Scheme & CGT reliefs or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.