Reduce tax on gains with EIS incentives

EIS CGT reliefs

Enterprise investment schemes (EISs) allow you a tax break for investing in small or medium-sized companies. You might already be aware of the income tax relief but perhaps not that for capital gains tax (CGT). This can indefinitely defer when the gain is taxed. EISs are readily available through financial advisors, banks and other financial institutions.

EIS investments, which are in the form of shares, are typically riskier than investing in listed companies. However, you may find managed EIS funds which spread your investment among a number of companies and so reduce the risk. You can also choose low, mid and higher risk funds.

Tax breaks

The headline tax relief that EISs provide is a 30% income tax credit. For example, if you invest £20,000, you can claim a reduction of £6,000 in your income tax liability. The two CGT reliefs are: any capital gain made on the investment is exempt from CGT, plus you can defer taxation of any other gain.

Example - part 1. Tina is a higher rate taxpayer. In May 2024 she made a capital gain of £2,900. This is covered by the £3,000 annual CGT exemption. In March 2025 one of the companies Tina has shares in is taken over resulting in a gain of £15,000. After using the remaining £100 of her CGT exemption, £14,900 is taxable at 24%. If Tina invests at least £14,900 in an EIS, the full taxable gain is deferred until the tax year in which she sells or transfers the EIS investment.

Tina doesn’t have to choose an EIS investment in haste. The tax relief, including the CGT deferral, can be claimed where an EIS investment is made in the tax year following that in which the gain was made.

Tina must own the EIS shares for three years or more, or the income tax relief will be lost and the deferred gain is chargeable for the year in which she sells or transfers the investment.

Defer to save

Although the EIS relief only defers when the gain is taxed, with simple planning you can turn the deferral into a tax saving.

Example - part 2. Tina sells her EIS shares in March 2028 when they are worth £2,500 more than she paid for them. This gain is exempt from CGT because of EIS relief. However, the £14,900 2024/25 gain she deferred is chargeable. The amount taxable is reduced by her annual exemption (say £3,000) for 2027/28. This saves Tina £720 compared with the CGT she would have paid without the EIS investment.

If Tina can sell the EIS investment in two parts, say 50% in 2027/28 and the remainder in 2028/29, she can double her tax saving to £1,440. If she has a spouse or civil partner she could transfer part of the investment to them and increase the tax saving to at least £2,880 or even more.