EIS Deferral Relief: Postponing Capital Gains Tax on a Property Sale

We've written before about why property development itself can never be the target of an EIS investment. What that earlier piece doesn't cover is the reverse situation: an investor who has just sold a property, or shares in a property company, and is looking at a Capital Gains Tax bill they'd like to push back rather than pay now. EIS deferral relief can do exactly that — but only by putting the money into a company with nothing to do with property, and only on a temporary basis.

How deferral relief works

EIS deferral relief, provided for in Schedule 5B TCGA 1992, is a different relief from the income tax relief most people associate with EIS, and the two don't have to be claimed together. Deferral relief is available against any chargeable gain, not just a gain on the disposal of shares, which is what makes it relevant here: a gain arising on the sale of an investment property, or on a disposal of shares in a property company, can be deferred provided a qualifying EIS investment is made within the permitted window. The gain is frozen at the amount reinvested and simply doesn't come into charge at the point of the original disposal.

The reinvestment window

The qualifying investment has to be made within a period running from twelve months before the disposal that produced the gain to three years afterwards. That's a genuinely wide window in practice: an investor who sells a property in one tax year has up to three years to identify a suitable EIS opportunity and still claim deferral against the earlier gain, rather than needing to have the reinvestment lined up before completion.

Property development still can't be the target

The company receiving the investment has to meet the ordinary EIS qualifying conditions in full, and that includes the excluded activities list that rules out property development and dealing in land, along with activities like banking, leasing, and operating hotels or care homes. So while the gain being deferred can come from a property disposal, the EIS company taking the reinvestment can't be another property vehicle. This is the point that trips people up most often: the relief lets a property gain be deferred, not recycled into more property on a tax-advantaged basis. The qualifying trade has to be genuinely unrelated to the transaction that created the gain.

Deferral, not exemption

It's worth being precise about what the relief actually does, because "CGT deferral" gets talked about loosely as if it were a form of exemption. It isn't. The gain is parked, not written off, and it comes back into charge when a triggering event occurs — most commonly a disposal of the EIS shares, but also where the company stops meeting the EIS conditions within the required period, where the investor becomes non-UK resident while still holding the shares within three years of issue, or where the shares are cancelled, bought back or exchanged. When the gain does crystallise, it's taxed using the rates and allowances in force in that later year, not the year of the original property sale, which cuts both ways depending on how CGT policy has moved in the meantime.

Where this fits for a property investor

For an investor facing a large gain on the sale of a property or a stake in a property company, EIS deferral relief is a genuine planning tool where there's a real appetite to hold EIS-qualifying investments as part of a wider portfolio, and where the investor understands the gain is coming back at some point rather than disappearing. It works less well as a mechanism bolted on purely to delay a tax bill with no independent interest in the EIS investment itself, both because the underlying investment carries its own commercial risk and because the connected-persons rules can restrict relief if the investor ends up holding too large a stake in, or having too close a relationship with, the company they've invested in.

Common questions

Does EIS deferral relief exempt a property gain from Capital Gains Tax?

No. EIS deferral relief postpones the gain rather than removing it. The chargeable gain is frozen at the point of reinvestment and comes back into charge when a later triggering event occurs, most commonly a disposal of the EIS shares. It is a timing tool, not an exemption, and the gain that eventually crystallises is taxed under whatever CGT rates and allowances apply at that later date, which may not match the position on the original property sale.

Can I get EIS deferral relief by reinvesting in another property company?

Generally no. To attract EIS deferral relief the company receiving the investment has to be carrying on a genuine qualifying trade, and the excluded activities list in the EIS legislation specifically rules out property development and dealing in land, along with several other activities such as banking, leasing and running hotels. A gain arising on the sale of an investment property or shares in a property company can still be deferred, but only by investing in a company operating an unrelated qualifying trade, not by recycling the proceeds into another property vehicle.

What is the time window for making a qualifying EIS investment to defer a property gain?

The reinvestment has to be made within a window running from twelve months before the disposal that created the gain to three years after it. Provided a qualifying EIS investment is made somewhere within that window and a valid claim is submitted, the gain arising on the earlier disposal can be deferred, even though the property sale and the EIS investment aren't part of the same transaction and don't need to be linked beyond falling within the time limit.

What brings a deferred gain back into charge?

A number of events can trigger the deferred gain, the most common being a disposal of the EIS shares other than to a spouse or civil partner. The gain also comes back into charge if the company stops meeting the EIS qualifying conditions within the required period, if the investor becomes non-UK resident while still holding the shares within three years of issue, or if the shares are exchanged, cancelled or bought back by the company. Once triggered, the originally deferred gain is charged in the tax year the triggering event occurs, using that year's rates.

This article is general information, not personal tax or legal advice, and the rules referred to can change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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