Guidance

HS297 Capital Gains Tax and Enterprise Investment Scheme (2023)

Updated 6 April 2024

The following guidance includes calculations.

This helpsheet explains capital gains aspects of the Enterprise Investment Scheme (EIS) for investors. But it’s only an introduction. If you’re in any doubt about your circumstances, you should ask your tax adviser.

HM Revenue and Customs (HMRC) will also be pleased to help and will provide any forms you may require. You can also consult the Venture Capital Schemes Manual, which explains the rules in more detail.

This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return.

You can find more information about the Enterprise Investment Scheme and Capital Gains Tax (CGT) in the Enterprise Investment Scheme — introduction.

Helpsheet 284 Shares and Capital Gains Tax and Helpsheet 286 Negligible value claims and Income Tax losses on disposals of shares you have subscribed for in qualifying trading companies, may also be of use to you.

There are 2 CGT Reliefs within the EIS:

• 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

What’s 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 which 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relief in full on the whole of your subscription(s) for the EIS shares and none of the Income Tax relief must have been withdrawn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• The amount of Income Tax relief is reduced or is withdrawn in full.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 because 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 2022 to 2023, to cover all or part of your gain.

For further information, go to 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 which 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.

Example 1 — Where you sell your shares at a loss

You subscribe £100,000 for 50,000 EIS shares on 1 May 2016. Income Tax relief of £30,000 is given. Less than 3 years later you sell all 50,000 shares for £60,000. Income Tax relief of £18,000 is withdrawn. Income Tax relief of £12,000 isn’t withdrawn and remains attributable to the shares sold.

The allowable loss is calculated as follows:	Amount
Disposal proceeds	£60,000
Minus cost	£100,000
Reduced by the Income Tax relief which has not been withdrawn (£12,000)	(£88,000)
Allowable loss	(£28,000)

Pages CGN 2 and CGN 3 of the Capital Gains Tax summary notes and Helpsheet 286 Negligible value claims and Income Tax losses on disposals of shares you have subscribed for in qualifying trading companies, explain how losses are allowed for capital gains and Income Tax purposes respectively. If you want to set the loss against your income you must claim Loss Relief within 1 year from the 31 January following the tax year in which the loss was made.

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 manual VCM16020 or you can ask HMRC or your tax adviser for help.

Examples of the interaction between Income Tax Relief and Disposal Relief, including disclosure requirements

What happens if you acquire more EIS shares in any tax year than can qualify for Income Tax relief and dispose of them at a gain after 3 years

Only part of the gain on your disposal will qualify for Disposal Relief for CGT.

Example 2

You subscribe £1,200,000 for 100,000 EIS shares issued by a trading company in 1 January 2018. You receive the maximum Income Tax relief £300,000. You sell the shares at a profit in 2021 to 2022 and no Income Tax relief has been withdrawn in the meantime. Disposal Relief exempts 5/6 of the gain from CGT. (The 5/6 is the maximum investment for which Income Tax relief was available in the year your shares were issued, divided by the actual investment for which Income Tax relief was claimed, £1,000,000 ÷ £1,200,000.)

What happens when Income Tax relief has been partly withdrawn and you dispose of the EIS shares at a gain after holding them for 3 years

Only part of any gain on your disposal will qualify for Disposal Relief for CGT.

Example 3

You subscribe £1,500,000 for 100,000 EIS shares issued by a trading company 1 January 2019. You receive the maximum Income Tax relief of £300,000. In 2018 to 2019 £30,000 of your Income Tax relief is withdrawn. You sell the EIS shares making a gain on 1 January 2023. Disposal Relief exempts 9/10 of the gain from CGT. (The 9/10 is the Income Tax relief given and not withdrawn, divided by the full Income Tax relief originally given, £270,000 ÷ £300,000).

What happens where your Income Tax liability is nil

If you have no liability to Income Tax before taking account of your subscription for EIS shares, you will receive no Income Tax relief and any gain on the disposal of the EIS shares will be chargeable. You may be able to use your CGT annual exempt amount (AEA), £12,300 for 2022 to 2023, to cover all or part of your gain.

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 Deferral Relief is

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.

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 discretion to extend these time limits and can explain the circumstances in which they will do this.

Example 4

You dispose of an asset on 6 June 2019 making a gain. You can claim Deferral Relief against this gain if you subscribe for EIS shares and these shares are issued to you at any time between 6 June 2018 and 6 June 2022.

Who can claim Deferral Relief

You can claim relief if you’re an individual resident in the United Kingdom (UK). You cannot claim relief if you are treated by double taxation arrangements as 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.

Example 5

In one tax year you have a gain of £100,000 on a disposal and you subscribe £100,000 for 100,000 EIS shares issued to you (in the same tax year). The AEA for the tax year is £12,300. You can claim Deferral Relief on the full amount of the gain of £100,000 or on any smaller amount, for example £87,700, leaving £12,300 to be covered by your AEA.

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.

Example 6

You disposed of an asset in May 2020 and were issued EIS shares in August 2022. You must make a claim to relief by 31 January 2029.

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)

Example 7

You defer a gain of £50,000 arising in 2018 to 2019 by subscribing £50,000 for EIS shares issued on 10 March 2018. If you sell all the EIS shares in March 2023, the whole of the deferred gain of £50,000 is revived in the tax year 2022 to 2023.

If you dispose of only some of your shares to which Deferral Relief is attributable, some of the deferred gain will be revived. The position is more complicated where you only dispose of some of your shares which you acquired at different times and you claimed Deferral Relief on some but not all of these shares. You have to identify the shares you have disposed of and the shares which have had Deferral Relief.

Example 8

You defer a gain of £20,000 arising in 2018 to 2019 by subscribing £20,000 for 20,000 EIS shares issued on 10 March 2018 If you sell 15,000 EIS shares in March 2023, part of the deferred gain is revived in the tax year 2022 to 2023. As you have sold 15,000 out of the 20,000 shares, the same proportion (3/4) of the deferred gain is revived: £15,000.

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 where shares are acquired on the same day and reliefs other than Deferral Relief are attributable to them, go to manual VCM16020 or ask us or your tax adviser for help.

Example 9

You make one subscription of £80,000 for 80,000 shares which could qualify for EIS Relief. You claim £60,000 Deferral Relief. You sell 50,000 shares in a subsequent tax year. The £60,000 Deferral Relief is attributable equally to all 80,000 shares. As you have sold 50,000 of the 80,000 shares, the same proportion (5/8) of the deferred gain is revived: £37,500

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.

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