Understanding EIS Deferral Relief: A Guide for Investors

The Enterprise Investment Scheme (EIS) is a UK initiative offering generous tax reliefs to investors, particularly those investing in early-stage businesses. One of the most valuable yet lesser-known benefits of the EIS is the deferral relief, which can help investors postpone capital gains tax (CGT) bills by reinvesting gains into qualifying EIS shares. This relief is a powerful tool for investors seeking to optimize their tax liabilities and make the most of their financial planning.

What Is EIS Deferral Relief?

EIS deferral relief allows investors to defer the payment of CGT on gains from the sale of assets such as shares, property, or other chargeable assets by reinvesting the proceeds into EIS-eligible shares. This means that the capital gains tax liability is effectively postponed, allowing investors to manage their tax obligations more strategically.

Each investor can invest up to £1 million in EIS shares per tax year, which increases to £2 million if the additional capital is allocated to knowledge-intensive companies (KICs). The maximum amount of CGT that can be deferred is tied to this investment limit, allowing for significant tax savings for high-net-worth individuals and experienced investors.

How Does EIS Deferral Relief Work?

To qualify for deferral relief, the gain from a chargeable asset must be reinvested in EIS-eligible shares. The reinvestment must occur within a window from one year prior to up to three years after the gain is realized. This gives investors flexibility in timing their reinvestments and deferring their CGT bills.

For example, if an investor sells a property and realizes a £100,000 capital gain, the usual CGT liability would be around £28,000. However, by reinvesting the gain into EIS shares between September 2023 and September 2027, the investor can defer that CGT bill, keeping the full gain intact. The deferred CGT liability will remain in place until the EIS shares are sold, at which point the tax is due. If the gains are reinvested again, the CGT liability can be deferred indefinitely, potentially until the investor’s passing.

Who Is Eligible for EIS Deferral Relief?

While UK residency is not required to invest in the EIS, it is a necessary condition for claiming deferral relief. Additionally, investors must meet several other requirements to qualify:

• Non-employee: Investors cannot be employed by the company offering the EIS shares.
• Capital gains tax liability: Investors must have realized or be planning to realize a CGT bill within the eligible timeframe.
• Minimum holding period: EIS shares must be held for at least three years to maintain eligibility for deferral relief.

Can You Push Back Any CGT Bill Using EIS Deferral Relief?

Yes, EIS deferral relief can be used to defer the CGT bill on any chargeable asset. Chargeable assets include a wide range of items such as listed equities, real estate (other than a primary residence), personal possessions over £6,000, and cryptocurrency.

The deferral relief can be a significant advantage for investors across different asset types, especially as CGT rates can vary depending on the asset and the investor’s income tax band.

Benefits of EIS Deferral Relief

EIS deferral relief offers several important benefits for investors:

• Flexible Tax Planning: Deferring CGT allows investors to manage their tax liabilities effectively, adjusting their strategy based on personal circumstances.
• Avoiding Immediate CGT: By reinvesting the proceeds from EIS shares, investors can delay CGT payments indefinitely, with the liability only becoming due when the EIS shares are sold.
• Maximizing Tax Allowances: With the UK capital gains tax allowance set to decrease significantly in the coming years, deferring CGT ensures that the allowance can be used more efficiently for other gains.
• Broad Applicability: Investors can use deferral relief for any chargeable asset, whether shares, property, cryptocurrency, or personal items, making it a versatile tool for a wide range of individuals.

Risks Associated with EIS Deferral Relief

Despite its advantages, EIS deferral relief comes with some risks that investors should be aware of:

• Residency Issues: If an investor ceases to be a UK resident within three years of investing in EIS shares, the deferral relief will no longer apply.
• EIS Eligibility Changes: If the company issuing the EIS shares loses its EIS eligibility within three years, the deferred CGT will be due.
• Regulatory Changes: The rules around EIS reliefs can change, although no significant changes have been made since the scheme’s introduction in 1996. Investors should remain informed about potential regulatory shifts.
• Deferral Period Uncertainty: While deferral relief offers flexibility, there is no guarantee as to when an exit or sale may occur, meaning the deferred CGT could remain outstanding for several years.

How to Claim EIS Deferral Relief

To claim deferral relief, investors need to complete the claim form attached to the EIS3 certificate they receive after purchasing EIS shares. This form should be submitted as part of the annual tax return, or for those who don’t file self-assessment returns regularly, they can complete the claim via HMRC’s online system. The claim must be filed within five years from the end of the tax year in which the EIS shares were issued.

Other Tax Advantages of the EIS

EIS deferral relief is just one of several tax benefits available through the scheme. Other key tax reliefs include:

• 30% Income Tax Relief: Investors can claim 30% of their investment back in income tax relief.
• Capital Gains Tax Exemption: Investors can avoid CGT on any gains made when EIS shares are sold.
• Inheritance Tax Exemption: EIS shares are exempt from inheritance tax, which can be particularly valuable for estate planning.
• Loss Relief: If an investment fails, investors can offset the losses against their income tax or CGT liabilities.

These reliefs make EIS an attractive option for tax-efficient investing, especially for high-net-worth individuals looking to reduce their tax liabilities while supporting early-stage businesses.

Accessing the Right EIS Investment

While EIS deferral relief is an attractive benefit, investors should ensure they fully understand the broader advantages of the scheme. The EIS offers a wide range of tax reliefs, making it important to consider the specific features of each investment opportunity. Whether seeking superior returns, diversification, or impact, thorough research and professional advice can help ensure that investors make the best decision for their financial goals.

Conclusion

EIS deferral relief is a powerful tax-saving tool that allows investors to defer their CGT liabilities while supporting early-stage companies. With the ability to reinvest gains and push back tax bills indefinitely, this relief offers significant flexibility for tax planning. However, like all investment strategies, it comes with risks, and investors should consult with a financial advisor to ensure they fully understand the implications before committing to EIS investments.