Real-world examples of EIS tax savings
Let’s say you sold a buy-to-let property and made a £100,000 gain. This is a chargeable gain for CGT purposes. At 20% CGT, you’d normally owe £20,000 in tax to HMRC. By investing that £100,000 into EIS companies, you can defer the entire £20,000 tax bill on the chargeable gain. You won’t pay until you eventually sell your EIS shares.
You’d also get £30,000 in income tax relief (30% of your investment), provided you have received income tax relief on the full amount. This can provide the maximum tax reduction allowed under EIS rules, effectively reducing your net investment to £70,000. If your EIS shares grow in value and you hold them for 3+ years, you’ll pay no CGT when you sell them. This tax-free growth can significantly enhance your returns.
I once advised a client who deferred a £50,000 capital gain from selling his rental property. By investing in an EIS-backed tech startup and obtaining full income tax relief, he not only postponed his tax bill but eventually paid nothing when the company was acquired three years later. In this case, the relief could also have been carried back to the previous year if it was more beneficial.
Even if your investment performs poorly, EIS offers loss relief. You can offset any losses against either income tax or capital gains tax, and you have the flexibility to set the loss against income in the year of disposal or the previous year, providing valuable downside protection.
Timing considerations for maximum benefit
Timing your EIS investments strategically can maximise your tax advantages. Planning carefully helps you get the most from the scheme. If you’ve recently made a significant gain, you have a 3-year window for EIS investments. This flexibility gives you time to find the right opportunities to defer that tax liability.
Many investors make their EIS investments just before the tax year end (5th April). This approach secures income tax relief quickly while maintaining options.
When claiming relief, it is important to pay careful attention to both timing and eligibility. Investors should ensure they have sufficient income tax liability to benefit from the reliefs, as reducing the investor's income tax liability to nil may limit or prevent access to certain exemptions. Obtaining an advance assurance letter from HMRC before investing can provide confidence that the investment will qualify for EIS relief, helping investors make informed decisions before committing funds.
You can carry back the relief to the previous tax year if that’s more beneficial. This feature provides additional planning flexibility. Remember that the 3-year holding period for disposal relief starts from when the company issues the shares. If the company begins trading later, the period starts from that date.
