Using the EIS to unwind capital gains tax

EIS

You’re probably aware of HMRC’s enterprise investment scheme (EIS) and the tax breaks it offers. However, if you’re considering using it for the first time we’ve got some useful tax planning ideas, but first we’ll take a look at the EIS basics.

Finding EIS companies

EIS tax breaks are available when you invest in shares in a company which has EIS status approved by HMRC. As these are unlisted on any main stock markets their shares can be tricky to acquire directly. The good news is that financial advisors etc. act as shop fronts for EIS companies.

You may have to wait to claim the tax breaks. While they are effective from the date the EIS company issues shares to you, tax relief can’t be claimed until the company confirms your investment by issuing an EIS3 certificate. Typically, this takes around six months.

Tax breaks

The tax breaks for the EIS are an income tax credit and capital gains tax (CGT) deferral. The former is a simple credit against your tax liability equal to 30% of the amount you invested. The second relief allows you to defer when you’re taxed on a capital gain.

Normally, the tax breaks apply for the tax year in which you invest but you can opt to have them apply to the previous tax year instead. Claim via your self-assessment or by completing the carry-back claim on the EIS3 and sending it to HMRC.

If you sell or transfer your EIS shares (except to your spouse or civil partner) within three years the income tax credit is clawed back, plus if you’ve deferred a capital gain it becomes chargeable for the tax year in which you sell or transfer the EIS shares.

Maximising the CGT break

While the CGT break on the face of it merely defers the inevitable, it can actually be used to permanently reduce a CGT bill. The example below shows how this can work, assuming CGT rates and the annual exempt amount stay the same.

Example. Olga and Tom are married and are both higher rate taxpayers. Olga sold assets in 2025/26 resulting in a capital gain of £20,000. After deducting her annual CGT exempt amount, £3,000, Olga is liable to CGT of £4,080 (£17,000 x 24%) for 2025/26. She invests £17,000 into an EIS portfolio in June 2026. On receiving the EIS3 Olga claims carry-back for £17,000 of her CGT and income tax EIS tax breaks to 2025/26. She then transfers £6,000 worth of the EIS shares to Tom.

In 2030/31 Olga and Tom sell half their shares in the EIS company and the other half in 2031/32. They make no other capital gain or losses in either of those tax years. The effect of the tax breaks are:

• income tax saving of £5,100 (£17,000 x 30%)
• no CGT to pay for 2025/26; and
• the 2025/26 CGT liability, originally £4,080, is not just deferred but reduced to £1,200.

Using the EIS to defer the 2025/26 capital gain and transferring part of the investment to her husband means that they can make use of multiple annual CGT exemptions (£3,000 x 2 for 2030/31 and £3,000 x 2 in 2031/32) thereby saving £2,880.

The EIS shares are exempt from CGT providing you hold them for at least three years and claimed income tax relief.