EIS Test Case: Capital gains tax exit exemption not linked to income tax entry claim. 4th September 2018 In a recent HMRC test case (Ames v CRC), the Upper Tribunal considered whether it was necessary for EIS income tax relief to have been claimed when an EIS investment was made, for the transaction to then potentially qualify for exemption from capital gains tax when the investment was sold. For the case in question, the usual EIS1 application process was followed; resulting in HMRC issuing an EIS2 certificate to the company, which in turn they converted into EIS3 certificates for the shareholders. Initial income tax relief was not claimed by one individual taxpayer shareholder as he did not have high enough taxable income that tax year to cover the deduction. When this shareholder realised his investment, for around £1/3m, having sought telephone advice from HMRC, no capital gains tax disclosures were made on his self-assessment return. HMRC became aware of this omission from the tax return and initially interpreted the EIS legislation as the EIS income tax claim being a prerequisite for a subsequent EIS capital gains tax exemption. Accordingly, they then raised a discovery assessment for £72k tax. The taxpayer appealed this interpretation to the First Tier Tribunal, but lost. He then took the decision to the Upper Tribunal, and won. This test case is helpful in clarifying that these two EIS tax benefits, together with EIS Deferral Relief, all operate independently of each other.