Can an EIS investment ‘convert’ residential capital gains tax rates into non-residential rates?

The issue

It is well known that EIS investments provide the ability for capital gains to be deferred until the EIS investment is disposed of. Such deferrals should be possible for any gains which are made in the period from three years before, to one year after the date of the EIS investment. It is perhaps less well-known that 28% residential property gains which are deferred will typically only end up being taxed at 20% when the EIS investment is disposed of. This represents a ‘real saving’ of 8% in addition to a deferral. This is the technical position provided by the legislation, although HMRC have tried to override this position in their guidance.

HMRC guidance

HMRC guidance says that any deferred gain will retain its original character and therefore if it is a residential property gain it will still be taxable at 28%. This may be what they want to happen but it is clearly not the effect of the legislation.


EIS deferral rules can be found in Schedule 5B TCGA 1992. This states that any revived gain is ‘equal to so much of the deferred gain’ in proportion to the amount of the EIS investment sold. Although this has the effect of resurrecting an amount of the deferred gain it is not powerful enough to retain the character of the deferred gain. Of course HMRC may argue otherwise but they should not be able to have it all ways.

Final comment

It is ironic that HMRC should be seeking to apply a purposive approach, rather than a legislative approach to the EIS legislation. It is not long ago that the ‘Ames case’ ruled that a taxpayer could not benefit from a capital gains tax exemption on EIS shares because he had not been able to claim income tax relief on the investment. This patently unfair result is an example of HMRC applying a legislative rather than a purposive approach when it suits them. They shouldn’t be able to pick and choose!




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