EIS Tax Relief Explained for Investors

EIS is a tax relief scheme created by the UK Government to encourage investment into startups and early-stage businesses.

As an investor, EIS benefits you by offering potentially significant income tax and capital gains reliefs when you make an investment into an EIS eligible startup or business.

As a business, EIS benefits you by making your company a more attractive and less risky investment opportunity to investors.

 

What is EIS Tax Relief?

 

When you invest into an EIS eligible company, you can receive tax benefits in the following ways.

 

EIS Income Tax Relief

 

You can claim back up to 30% of the value of your investment in the form of income tax relief. Therefore if you make an investment of £10,000 you can save £3,000 in income tax.

 

EIS Capital Gains Tax Relief

 

Disposal Relief

If you hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from Capital Gains Tax when you come to sell them. Therefore, if you buy your shares for £10,000 and in 3 years they are worth £30,000, you will not have to pay capital gains tax on the £20,000 gain if you decide to sell your shares. Please note that is is an example only, and due to startup equity being a high risk asset class, your investment value can also decrease over time.

 

Deferral Relief

You will not have to pay Capital Gains Tax until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for EIS. You will usually have to pay the Capital Gains Tax when you dispose of the EIS shares.

 

EIS Loss Relief

 

If the business performs poorly and you lose money on your investment, you may claim loss relief.

The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 45%, you can claim to 45% of your net loss in income tax relief.

For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly you could claim the 30% income tax relief (£3,000 in this example). You can then claim loss relief on the remaining £7,000 of an amount equal to your income tax bracket – in this scenario 45% or £3,150, meaning your total loss is only £3,850.

 

Applying tax relief to a previous year (carry-back)

 

You can treat some or all of the shares as being issued in the preceding tax year, as long as you had not reached the limit for the value of EIS shares purchased (£1,000,000) in that year.

If, for example, you invest £10,000 in an EIS eligible company in the 2018-19 tax year, your income tax relief would be £3000 (30% of £10,000). You can apply to have that £3,000 carried back to the previous tax year (2017-2018) and relieved against your tax in that year, as long as you had not acquired more than £1,000,000 worth of EIS shares in that year.

 

EIS Inheritance Tax Relief

 

You can generally claim Inheritance Tax relief of 100% after two years of holding the EIS shares. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.

 

Who can claim EIS Tax Relief?

 

To qualify for the tax benefits, investors must abide by the following rules:

• You can only invest up to a maximum of £1 million in any number of qualifying companies in each tax year.
• You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3 year period, you will be subject to relief clawback.
• You can not carry-forward your EIS tax relief.
• You must be a UK taxpayer.
• You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director)
• You must be buying brand new shares that are not already on the market.

 

What are the EIS rules for businesses?

 

The aim of EIS is to help you grow your company by making it easier to raise funds. It does this by offering significant tax relief to investors.

Your company can raise a maximum of £5 million in total in any 12-month period under EIS (if you raise more, only up to £5 million worth of shares with be eligible for EIS).

Your company must not have more than £15 million of gross assets.

Your company must have fewer than 250 full-time equivalent employees.

 

What is the difference between EIS and SEIS?

 

You may have also heard of SEIS tax relief. The main difference between the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) is that SEIS is focused on earlier-stage (seed stage) companies than EIS.

To be eligible for SEIS, a company must be raising no more than £150,000, whereas to be eligible for EIS a company can be raising up to £5 million. For investors, there are also significant differences in tax relief benefits. You can read our guide to SEIS tax relief over here.

 

How to claim EIS income tax relief

 

You can normally claim EIS tax relief when you file your tax return. You’ll either reduce your tax bill for the year or receive a refund for tax you’ve already paid.

Claims for losses and for relief for those losses must be made through the tax return and the time limit is the following 31 January, one year after the end of the tax year of the loss. This is 12 months after the deadline for submitting the tax return for that year.

Alternatively, just pass on the relevant details to your tax advisor.

You will normally claim EIS tax relief when you complete your tax return. You will be asked some information which is included in your EIS3 certificates.

These are certificates you receive from each of the companies you invested in, typically a few months after the investment. If you invested in a fund, you will typically receive one EIS3 for each of the underlying companies.

In the rare event you invested in an “Approved EIS fund”, the fund manager will send you a single EIS5 certificate.

Both EIS3 and EIS5 certificates contain the same information, which you will need:

• The name of the company in which you have invested
• The amount you have subscribed and on which you can claim tax relief
• The date the shares were issued (this is usually different from the date you invested)
• The name of the relevant HMRC office and its reference

What you do next will depend on how you submit your tax return (by post or online).

 

What happens to EIS shares on death?

 

EIS shares are treated like any other shares you buy in the stock market. This means when you die they form part of your estate and can be passed on to whomever you choose. There is one important difference though: EIS shares could be IHT free.

Should the death occur within three years from the investment, there is no clawback of any of the tax reliefs. IHT relief, however, could only be available if the shares have been held for at least two years.

Any beneficiary who receives the shares will not benefit from any EIS tax reliefs, so capital gains tax might be due on any gain compared with the value at the date of death of the deceased.