🇬🇧Venture Tax Reliefs: QSBS, EIS/SEIS and Opportunity Zones

The concept

Governments are willing buyers of venture risk. A young company brings jobs, technology and future tax receipts, so the investor prepared to put money at risk at the most fragile stage is offered a discount: part of the gain on a successful exit goes untaxed. It is a fair bargain between the treasury and capital, and in 2025–2026 its terms were thoroughly rewritten.

There are three major systems. The United States exempts gains on sales of small business stock through QSBS (§1202). The United Kingdom subsidizes the entry itself: EIS and SEIS deliver an upfront deduction plus a CGT exemption at exit. The third system is American again, and regional: Opportunity Zones, turned into a permanent regime by OBBBA. Local counterparts have grown up around these templates, including Russia's five-year exemption.

The plan: we take each system apart, pin down the new 2025–2026 rules, and find the line beyond which optimization starts to destroy the relief itself.

QSBS: the American benchmark

§1202 of the Internal Revenue Code exempts from federal tax the gain on a sale of qualified small business stock — shares in a US C-corporation acquired directly from the issuer at original issuance. At issuance the company must pass the gross assets test and run an active business; finance, real estate and professional services are excluded. We take the §1202 machinery apart bolt by bolt in a dedicated article on QSBS.

Rules for stock issued before July 4, 2025

For stock issued before July 4, 2025, the classic rules apply: a 5-year holding period, a 100% exclusion, and a ceiling equal to the greater of $10M or 10× basis per issuer. The full 100% covers issuances from September 28, 2010 onward; earlier vintages carry a more modest exclusion — 50% or 75%. The issuer's gross assets threshold is $50M at the time of issuance. The issue date locks in the regime forever: the new rules give these shares nothing and take nothing away.

The cap runs per taxpayer, per company, so a portfolio of three successful startups yields three caps. Employees with options are in the game too: exercise starts the holding period and the five-year clock — details in our article on ESOPs and option plans.

The new OBBBA regime

The One Big Beautiful Bill Act, signed on July 4, 2025, rewrote §1202 for new issuances. For stock issued after that date, the exclusion is tiered:

• 3-year hold — 50%
• 4 years — 75%
• 5 years — 100%

The per-issuer cap rose from $10M to $15M, inflation-indexed from 2027; the 10× basis alternative survives. The gross assets threshold climbed from $50M to $75M and is indexed as well — later-round companies now fit within the relief.

The tiers cured an old pain point: a sale in year four used to wipe out the benefit entirely, whereas now an early M&A costs the investor part of the exclusion rather than the whole relief. QSBS is open to anyone who pays US capital gains tax; who ends up in that category, and when, is covered in our article on US tax residency.

§1045: rolling over instead of selling

An early exit does not have to end in tax. §1045 moves the gain on a QSBS sale into stock of another qualified company. The parameters people garble: the holder must be “a taxpayer other than a corporation”, the stock sold must have been held more than 6 months, and the reinvestment window is 60 days from the date of sale (QOZ allows 180). Gain left unrecognized reduces the basis of the replacement stock under §1045(b)(3), so the mechanism buys deferral plus a second run at a full exclusion.

Two details decide the outcome. §1045(b)(4)(B): replacement stock has to satisfy the §1202(c)(2) active business test only for its first 6 months — the company may deteriorate afterwards without killing the relief. §1223(13) tacks the holding period of the old stock onto the new, carving out only §1202(a)(2) (empowerment zone businesses) and §1202(c)(2)(A). The OBBBA tiers sit in the new §1202(a)(5), which never made that carve-out list, so on a literal reading tacking reaches the 3/4/5-year tiers as well. The IRS has taken no position: since July 4, 2025 there has been no Rev. Rul. and no refreshed §1045 procedure.

There is no dedicated election form. Rev. Proc. 98-48: report the whole gain on Schedule D, write “section 1045 rollover” beneath that line, and enter the deferred amount on the same line as a loss; the deadline is the return’s due date for the year of sale, extensions included. Funds run on Treas. Reg. § 1.1045-1: an eligible partner holds its interest on the date the partnership acquires the QSBS and continuously for more than 6 months afterwards.

The state layer

A federal exclusion binds no state. California rejected §1202 in so many words — Cal. Rev. & Tax. Code § 18152: “Section 1202 of the Internal Revenue Code... does not apply”. There is no separate capital gains rate there, so the gain runs up the ordinary schedule: the top 2025 bracket is 12.30% (single from $742,953, MFJ from $1,485,906), plus the 1% Mental Health Services Act surcharge under § 17043 on income above $1,000,000. That is 13.3% on an exit which is 100% exempt federally. The SB 711 conformity update (signed October 1, 2025, moving the specified date to January 1, 2025) left § 18152 alone: it is a standalone, explicit opt-out.

The state layer is the second, independent reason DINGs, NINGs and WINGs exist: a non-grantor trust sited in a state with no income tax strips out the state tax, while the federal exclusion needs no trust at all.

The UK: EIS, SEIS and their logic

The British model pays for the entry. EIS grants 30% income tax relief on investments of up to £1M a year; the limit doubles to £2M if everything above the first million goes into knowledge-intensive companies. After 3 years the shares sell free of CGT, and a loss may be set against ordinary income. On top sits deferral relief: the gain on the sale of any asset can be deferred by reinvesting it into an EIS company.

SEIS works one floor down, at the seed stage: 50% relief on up to £200k a year plus 50% CGT reinvestment relief. The rates are more generous because the risk is higher — the companies are under three years old.

The sunset of both schemes was extended to 2035 back in the Autumn Statement 2023. The price of the extension was control: the risk-to-capital condition requires the investor's capital to be genuinely at risk, and the Finance Act 2026 added procedural requirements around share issuance and advance assurance. The relief works only against UK tax, so expats on the new FIG regime should check their plan against our UK FIG article.

Opportunity Zones 2.0

The program's first version (2017) was an experiment with a deadline: deferral until a fixed date of December 31, 2026, and bonuses that melted away with every passing year. OBBBA turned the experiment into a permanent regime and relaunched the mechanics.

Zone maps are now redrawn every 10 years; the first new zones take effect on January 1, 2027. The deferral has become rolling: tax on gain reinvested into a QOF is deferred for 5 years from the date of investment, with no calendar anchor. From there, the holder's ladder:

• 5-year hold — a +10% basis step-up (+30% for rural QOFs)
• 10 years — all appreciation inside the QOF exits tax-free

The logic differs from QSBS: here the government is buying geography, and the rollover into a QOF is available for gain on any asset — shares, a business, real estate. For families sitting on large unrealized positions, this is a workable alternative to the "hold until death" strategy; more on that in our article on capital gains tax and the buy-borrow-die strategy.

Inside the fund: the 90% test, the penalty, the calendar

A QOF holds at least 90% of its assets in qualified opportunity zone property, and §1400Z-2(d)(1) measures that as the average of two readings — the last day of the first 6-month period of the fund’s taxable year and the last day of the year. Either reading standing alone counts for nothing.

Failing the test does not dissolve the fund. §1400Z-2(f) imposes a monthly penalty: the shortfall below 90% multiplied by the § 6621(a)(2) underpayment rate for that month; a partnership allocates it across partners’ distributive shares, and a reasonable cause exception applies. The provision points at “the 90-percent requirement of subsection (c)(1)” although the requirement lives in (d)(1) — a drafting defect in the Code itself.

Substantial improvement under §1400Z-2(d)(2)(D)(ii): over any 30-month period from acquisition, additions to basis must exceed the property’s adjusted basis; OBBBA cut the rural threshold to 50% of basis, effective on enactment rather than in 2027. Working capital sits behind the safe harbour of Treas. Reg. § 1.1400Z2(d)-1: 31 months, given a written designation, a written schedule and actual adherence to it, and up to 62 months for a start-up business.

A rural area now means “any city or town with a population of equal to or less than 50,000 inhabitants”, contiguous tract designation is gone, and the FMV step-up is capped at 30 years. Reporting under §§ 6039K and 6039L, with penalties under § 6726, applies immediately.

The Russian angle

Russia's counterpart is Art. 217(17.2) of the Russian Tax Code: the sale of shares or participation interests in Russian companies after 5 years of continuous ownership is exempt from personal income tax. The relief is alive, though it has narrowed noticeably over the past two years.

Since January 1, 2025 the exemption has been capped at ₽50M of income per year; the excess is taxed on the ordinary scale. The same date closed the relief to tax non-residents. From 2026, Federal Law No. 425-FZ of November 28, 2025 brings a new round of restrictions: the "real estate at most 50% of assets" test now expressly extends to LLC participation interests, foreign-agent status for even a single day in the year forfeits the exemption outright, and exiting an LLC against payment of the actual value of the interest is no longer tax-free even after five years of ownership. Only one relief-eligible scenario remains — a direct sale of the interest.

For mobile families the main risk sits at the seam between jurisdictions: losing Russian tax residency kills the relief, while the new country may tax the same exit under its own rules. A map of those traps is in our overview of exit taxes; if the interests are wrapped in a foreign holding company, add the CFC rules to the analysis.

Local counterparts: Europe and Israel

Copies of the American and British models have spread across the continent, and none of them reproduces the original.

Israel sits apart: the Law for the Encouragement of Knowledge-Intensive Industries was enacted on July 31, 2023 as a הוראת שעה and by its own terms runs to the end of 2026 — a credit on investments up to ILS 4M with a 3-year hold, and a deduction on a share swap up to ILS 5.5M. Barnea and PwC report different target-company thresholds, and no extension is visible as of this review.

Where the line runs

Every relief breeds an industry devoted to stretching it, and every jurisdiction has its own circuit breaker.

In the US it is stacking: the QSBS cap is computed per taxpayer, so founders gift stock to parents, children and chains of non-grantor trusts — each holder collecting its own $15M exclusion. Moderate versions work; aggressive ones run into the judicial doctrines. Step transaction fuses artificial steps into a single operation; substance over form disregards trusts with no independent economic role.

In Britain the circuit breaker is hard-wired into the statute: the risk-to-capital condition of the Finance Act 2018 demands that the company have plans to grow and that the investor face a genuine risk of losing capital. Buyback guarantees, liquidation preferences and other forms of "safety cushion" cost a company its EIS status.

A separate front is fund managers trying to slide carried interest under the venture reliefs: that battle has an article of its own — carried interest in 2026. The principle is the same everywhere: the relief is payment for real risk, and a structure that eliminates the risk sooner or later eliminates the relief.

§643(f) and packing

The limiter on trust structures is statutory as well as judicial. §643(f) collapses several trusts into one where both conditions hold: “substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries” and “a principal purpose of such trusts is the avoidance of the tax”; husband and wife count as one person. Hence the survival checklist: distinct primary beneficiaries, varied distribution standards, different power holders, separate trustees. The transfer itself rests on §1202(h), under which the donee is “treated as having acquired such stock in the same manner as the transferor” and inherits the holding period.

Packing lives next door to stacking: it inflates basis to reach the other half of the §1202(b)(1) cap — “10 times the aggregate adjusted bases”. Under §1202(i)(1)(B) the basis of the stock “shall in no event be less than the fair market value of the property exchanged”, so partners contribute a $40M operating partnership into a fresh C-corp under §351, basis for §1202 purposes equals FMV, and the ceiling swells to $400M against a default $15M. The bill arrives in three parts: §1202(i)(2) leaves pre-contribution appreciation as ordinary capital gain, a contribution carried at FMV easily breaches the $50M/$75M gross assets threshold and destroys the status outright, and an inflated valuation invites a dispute.

Popular — and how it ends

A trust farm for QSBS. A month before the deal, a founder gifts stock into eight non-grantor trusts with identical terms and a common trustee, counting on turning one $15M cap into eight. The ending is predictable: the IRS watches exclusion multiplication closely, the step transaction doctrine lets it collapse eve-of-exit gifts into a single operation, and bills capping the exclusion at one per family have been circulating in Congress since 2021. Modest structures stand a chance: two or three trusts with distinct beneficiaries, independent trustees and a history running several years back before the deal.

An EIS fund "with your capital guaranteed." The manager pitches a handsome combination: 30% relief plus principal protection through buyback options. It sells wonderfully and ends with a letter from HMRC: the guarantee destroys the risk-to-capital condition, the advance assurance is withdrawn, and the relief is clawed back retroactively. The investor repays the deduction with interest and is left holding an illiquid share with no reliefs attached. Since the Finance Act 2018, schemes like this have lost their disputes almost without exception.