EIS Deferral Relief: How Reinvesting a Capital Gain Defers CGT 2026/27

What Is EIS Deferral Relief?

The Enterprise Investment Scheme (EIS) is best known for its 30% income tax relief, but it also carries a separate and often overlooked benefit: capital gains deferral relief. This allows an individual who has made (or expects to make) a chargeable capital gain on almost any asset to defer paying Capital Gains Tax (CGT) on that gain by reinvesting an equivalent amount into EIS-qualifying shares.

Deferral relief does not exempt the gain from tax permanently -- it simply postpones the tax point. The original gain is "frozen" and reactivated later, when the EIS shares are eventually disposed of. This makes it fundamentally different from the CGT exemption that applies to gains made on the EIS shares themselves after a 3-year hold, which is a genuine, permanent exemption rather than a deferral.

Investors use deferral relief most commonly after selling a business, a second property, or a significant shareholding, where the resulting CGT bill can be substantial and there is an appetite to redirect some of the proceeds into early-stage UK companies.

How the Deferral Mechanism Works

The mechanics are straightforward in outline, though the paperwork requires care:

1. You realise a chargeable gain on the disposal of an asset (shares, property, a business, and so on).
2. Within the qualifying window, you subscribe for new EIS shares in a qualifying company.
3. You make a claim to defer some or all of the gain against the EIS investment.
4. The gain is not charged to CGT in the year it arose -- instead, an equivalent amount is "banked" against the EIS shares.
5. When the EIS shares are later sold, gifted (other than to a spouse), or become disqualified, the deferred gain comes back into charge in that later tax year.

Crucially, it is the amount reinvested that is deferred, not the entire sale proceeds. If you sell an asset for £500,000 with a gain of £150,000, and reinvest £100,000 into EIS shares, you can defer £100,000 of the gain. The remaining £50,000 gain is taxed in the normal way, using your CGT Annual Exempt Amount (£3,000 in 2026/27) and the standard 18%/24% rates.

The Reinvestment Window

One of the more valuable features of EIS deferral relief is the length of the reinvestment window: you can make the EIS investment up to 1 year before the disposal that generated the gain, or up to 3 years after it. This is far more generous than, for example, the reinvestment window under rollover relief for business assets.

This flexibility means investors are not forced to rush into an EIS investment simply to use the relief. Someone who sells a business in one tax year can take up to three further tax years to identify a suitable EIS opportunity, carry out due diligence, and make the investment -- while still being able to defer the gain back to the original disposal year.

What Happens When the EIS Shares Are Sold

The deferred gain does not disappear. It is simply parked until a "chargeable event" occurs in relation to the EIS shares. The most common chargeable events are:

• Sale of the EIS shares (at a gain, a loss, or for nil consideration)
• The company ceasing to meet EIS qualifying conditions
• The investor becoming non-UK resident before certain conditions are satisfied
• A negligible value claim being made on worthless shares

At that point, the originally deferred gain crystallises and is taxed using the CGT rates and reliefs available in the tax year the chargeable event occurs, not the year the original gain arose. If CGT rates have changed in the interim, the later rates apply. This means deferral relief carries genuine rate risk as well as reward -- if rates rise before the EIS shares are sold, the deferred gain could be taxed more heavily than if it had simply been paid at the time.

Interaction with EIS Income Tax Relief

EIS income tax relief and deferral relief are two entirely separate reliefs, both triggered by the same EIS share subscription, and both evidenced by the EIS3 certificate the company issues once HM Revenue and Customs has confirmed the shares qualify.

Income tax relief:

• 30% of the amount invested, up to £1 million per tax year (or £2 million if the excess is invested in knowledge-intensive companies)
• Can be carried back to the previous tax year
• Requires shares to be held for at least 3 years, or the relief is clawed back

Deferral relief:

• No percentage rate -- it defers £1 of gain for every £1 reinvested
• No annual cap on the amount of gain that can be deferred
• No formal minimum holding period attached to the deferral mechanism itself, though early disposal still triggers the deferred gain coming back into charge

A common scenario: an investor sells a rental property for a £120,000 gain and invests £80,000 into EIS shares. They can claim income tax relief of £24,000 (30% of £80,000) against their income tax bill, and separately defer £80,000 of the property gain. The remaining £40,000 gain is taxed as normal in the year of the property sale.

Worked Example

Anna sells a second home in 2026/27, realising a chargeable gain of £180,000 after deducting her CGT Annual Exempt Amount of £3,000. She invests £100,000 in a qualifying EIS company within the reinvestment window.

• She claims EIS income tax relief of £30,000 (30% of £100,000), reducing her income tax liability for the year.
• She claims deferral relief on £100,000 of the property gain.
• The remaining £80,000 gain on the property is chargeable in 2026/27 at the residential property CGT rate (18% or 24% depending on her income tax band).
• The deferred £100,000 gain sits dormant until Anna sells the EIS shares, at which point it becomes chargeable using the CGT rules in force in that future year.

If Anna holds the EIS shares for over 3 years and they have grown in value, the growth in value of the EIS shares themselves is entirely CGT-free (assuming income tax relief was given and not withdrawn) -- but the £100,000 deferred gain from the property sale is still taxable when the shares are eventually sold, since deferral relief only postpones tax, it does not extinguish it.

Risks and Practical Considerations

EIS investments are inherently high risk. The companies are typically early-stage, unlisted, and may fail entirely. Investors should not let the attractiveness of the tax deferral drive the underlying investment decision -- the commercial merits of the company must stand on their own.

Other practical points:

• The EIS company must issue shares that qualify at the time of issue; retrospective disqualification can unwind both income tax relief and deferral relief.
• Deferral relief claims are made via the SA108 supplementary pages of the Self Assessment return, referencing the EIS3 certificate.
• Death of the investor while still holding the EIS shares extinguishes the deferred gain entirely -- it does not pass to the estate as a chargeable gain, which makes EIS deferral a useful tool in some later-life estate planning conversations alongside Inheritance Tax planning.
• Multiple smaller EIS investments across several tax years can be used to defer gains piecemeal, rather than requiring one large investment.

Sources

• HMRC: Venture Capital Schemes Manual -- EIS deferral relief
• gov.uk: Enterprise Investment Scheme (EIS)
• gov.uk: Capital Gains Tax rates and allowances
• HMRC: Self Assessment: Capital gains summary (SA108)