How does EIS deferral relief on Capital Gains Tax work?

Full answer

EIS deferral relief is distinct from EIS income tax relief and EIS CGT exemption on the EIS shares themselves -- it specifically lets you push a capital gain from an entirely unrelated asset into the future, deferring the tax bill rather than eliminating it. **How it works** When you make a chargeable gain on any asset (property, shares, a business, anything subject to CGT), you can defer some or all of that gain by investing a matching amount into shares in an EIS-qualifying company. The gain is 'frozen' and does not become chargeable again until a later triggering event -- typically when you eventually dispose of the EIS shares, or if the EIS shares stop qualifying (e.g. the company loses its qualifying trade status) before the normal 3-year holding period is up. **Timing window** You can claim deferral relief for EIS investments made within a generous window: from 1 year before the original gain arose, up to 3 years after it. This gives considerable flexibility to make the qualifying EIS investment either shortly before or well after the disposal that created the gain. **Deferral, not exemption** Critically, deferral relief does not make the original gain disappear -- it simply delays when it is taxed. The gain 'comes back to life' and becomes chargeable again when you eventually sell (or otherwise dispose of) the EIS shares, unless you make a further deferral investment at that point to defer it again, or the shares are held until death (deferred gains, like most gains, are generally wiped out entirely on death for CGT purposes). **Worked example** James sells a rental property in 2026/27 realising a £150,000 taxable gain. Rather than paying CGT immediately, he invests £150,000 into EIS-qualifying shares within the deferral window. The £150,000 gain is deferred -- no CGT is due on it now. He also separately gets EIS income tax relief (30% of the amount invested, so £45,000 off his income tax bill for the year, subject to normal EIS limits) on the same investment, since deferral relief and income tax relief are independent and can be claimed on the same subscription. Three years later, James sells his EIS shares for a modest profit. At that point, the originally deferred £150,000 gain becomes chargeable (taxed at whatever CGT rate applies at that future date), while any separate gain on the EIS shares themselves is entirely CGT-free (assuming the EIS shares were held for the qualifying 3-year period and income tax relief was not withdrawn). **Why this is valuable** Deferral relief is especially useful for individuals expecting their circumstances (income levels, available reliefs, or the CGT rate itself) to change favourably in future years, or simply wanting to delay a large tax bill while redeploying capital into higher-risk, high-growth EIS investments -- though the underlying EIS investment risk (small unlisted companies can fail entirely) must be weighed carefully against the tax deferral benefit, and losing money on the EIS shares does not retroactively cancel the originally deferred gain.

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