Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
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Risk Summary

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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  • You could lose all the money you invest
  • Most investments are shares in start-up businesses or bonds issued by them. Investors in these shares or bonds often lose 100% of the money they invested, as most start-up businesses fail.
  • Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.

You won't get your money back quickly

  • Even if the business you invest in is successful, it will likely take several years to get your money back.
  • The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
  • Start-up businesses very rarely pay you back through dividends. You should not expect to get your money back this way.
  • Some platforms may give you the opportunity to sell your investment early through a 'secondary market' or 'bulletin board', but there is no guarantee you will find a buyer at the price you are willing to sell.

Don't put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Learn more here.

The value of your investment can be reduced

  • If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
  • These new shares could have additional rights that your shares don't have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

You are unlikely to be protected if something goes wrong

  • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker.
  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA's website here.

For further information about investment-based crowdfunding, visit the crowdfunding section of the FCA's website here.
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Insights
EIS
Matthew Robineau
· 5 min read
· Updated on

EIS Tax Rebate Explained

When it comes to tax-efficient investments, the Enterprise Investment Scheme (EIS) is a standout.

A critical component of the scheme, often referred to as an "EIS tax rebate," is the range of tax reliefs available to investors. While many know it as EIS tax relief, the rebate highlights the tax savings where investors can claim back already paid tax.

In this blog, we'll dive into the key elements of the EIS tax rebate, covering the tax advantages and why this remains a powerful tool for investors looking to reduce risk while supporting early-stage companies.

What is the EIS Tax Rebate?

The 'EIS tax rebate' refers to the ability to reclaim a portion of income tax through the Enterprise Investment Scheme (EIS), regardless of when during the tax year you make the investment.

After investing in an EIS investment opportunity, you’re eligible to reclaim up to 30% of your investment amount as a rebate on income tax paid that tax year.

This reclaim process applies whether you invest at the start or end of the tax year, providing flexibility and significant tax savings for eligible investors. Additionally, the EIS offers other tax advantages, including deferral of capital gains tax, loss relief, and exemption from inheritance tax (IHT), making it a versatile and tax-efficient investment choice.

Read more: Income tax relief and the EIS: what you need to know as an investor

The Key Benefits of the EIS Tax Rebate

1. 30% income tax rebate

When you invest in an EIS-eligible company, you can claim back 30% of the value of your investment as a rebate on your income tax. This makes it an attractive incentive for investors looking to support innovative businesses.

For example, if you invest £30,000, you could receive up to £9,000 back in income tax relief. If you're in the higher tax band of 40%, this rebate effectively reduces your taxable income, allowing you to retain more of your earnings.

This rebate not only reduces your immediate tax liability but also enhances your overall investment strategy by allowing you to allocate funds more effectively. As well as leveraging this rebate, you are able to diversify your portfolio while supporting the growth of promising start-ups.

2. Capital gains tax deferral

The EIS tax rebate also includes the ability to defer capital gains tax (CGT). If you've recently sold an asset, such as property or shares, and are facing a CGT bill, you can reinvest those gains into EIS and defer the payment of CGT until you sell your EIS shares. This provides more flexibility in your tax planning as well as being able to make use of taxed money to potentially make additional returns.

Example: if you sold a property with a gain of £200,000 and are liable for 20% CGT, reinvesting this amount into EIS shares defers the £40,000 CGT liability. Using an EIS calculator, you can plan investments for your personal situation.

This deferral allows you to manage your cash flow more effectively, providing the opportunity to reinvest in other ventures or maintain liquidity for future opportunities. It also aligns with strategic financial planning, enabling you to optimise your tax obligations over time.

3. Capital gains tax exemption on growth

Perhaps one of the most exciting aspects of the EIS rebate is the potential for tax-free growth. Any gains on your EIS shares are completely free from CGT if held for at least three years, significantly boosting your returns compared to traditional investment options like stocks and shares or cryptocurrencies, which are all taxed unless stored in a tax-efficient account like an ISA.

Imagine investing £75,000 in an EIS company, and after five years, your shares are worth £150,000. The £75,000 gain is entirely tax-free, saving you up to £15,000 in CGT if you are in the 20% tax band.

EIS capital gains exemption encourages long-term investment, allowing you to benefit from the growth potential of early-stage companies. By holding your shares for the required period, you can maximise your returns and contribute to the success of innovative enterprises simultaneously.

4. Loss relief for added security

Even though investing in early-stage companies involves risk, the EIS rebate includes loss relief to soften the blow if things don’t go quite as planned. These Losses can be offset against your income or capital gains tax, based on your tax band.

For example, if you invest £50,000 and incur a loss of £20,000 after tax relief, you could claim back up to 45% of that loss, depending on your income tax bracket. This means you could recover £9,000 if you're in the 45% tax band, reducing your net loss to £11,000.

This EIS loss relief provides a safety net, making it easier to take calculated risks in your investment strategy. By mitigating potential losses, you can confidently explore opportunities in high-growth sectors, knowing that your financial exposure is limited.

5. Inheritance tax exemption

Investing through the enterprise investment scheme can also relieve inheritance tax (IHT). After two years, any EIS shares you hold will be exempt from IHT, offering another layer of tax-efficient wealth preservation for your investment planning.

Should an investor who has exceeded the £325,000 IHT nil-rate band pledge £200,000 in EIS shares two years before passing, rather than having to forfeit £80,000 of that sum in inheritance tax (mandatory under certain savings accounts), they can pass the full value of their shares on IHT and CGT free.

This exemption supports long-term wealth management, ensuring that your investments contribute to your legacy. By incorporating EIS shares into your estate planning, you can efficiently transfer wealth to future generations while supporting the growth of the UK's most innovative start-ups.


How to Claim an EIS Tax Rebate

Claiming your rebate is a straightforward process. Once you've invested and received your EIS3 certificate, you can claim the rebate through your self-assessment tax return. If you pay tax via PAYE, you can even claim the rebate during the tax year itself by adjusting your tax code.

For those deferring capital gains, you’ll need to attach the appropriate forms to your tax return, and for loss relief, ensure you report unlisted shares and securities correctly.New call-to-action

EIS Tax Rebate FAQ

1. What types of companies qualify as EIS-eligible?

EIS-eligible companies are typically early-stage businesses based in the UK, operating in sectors that promote growth and innovation. These companies must meet specific criteria set by HMRC, such as being unlisted, having fewer than 250 employees, and possessing less than £15 million in gross assets.

Additionally, another business must not control the companies, and the funds raised through EIS must be used to grow and develop their operations, not to refinance existing debts. Investing in such businesses allows investors to benefit from an EIS tax rebate.

2. Are there any restrictions on the amount you can invest to receive the EIS tax rebate?

Yes, there are limits on how much you can invest while still qualifying for the EIS tax rebate. The maximum annual investment eligible for the rebate is £1 million, or up to £2 million if at least £1 million is invested in knowledge-intensive companies.

Any investments exceeding these amounts won't qualify for the tax rebates, meaning you won’t be able to claim tax relief on those additional sums.

3. What happens if I sell my EIS shares before the three-year holding period?

If you sell your EIS shares before the three-year holding period, you lose the entitlement to the EIS tax rebate. This means that any income tax rebate you claim will have to be repaid, and any deferred capital gains tax will also become due.

Furthermore, you won't be eligible for the capital gains tax exemption on the sale, meaning you’ll miss out on the potential tax-free growth that EIS offers.

4. Can I still qualify for loss relief if the company fails?

Yes, you can still qualify for EIS loss relief as part of your tax rebate even if the company goes bankrupt. If your EIS shares lose value, or the company becomes insolvent, you can offset your loss against either your income tax or capital gains tax, which can reduce the financial impact.

The extent of your rebate will depend on your overall tax bracket and how much you've already claimed in relief.

5. Is enterprise investment scheme (EIS) tax relief the same as tax rebate

No, enterprise investment scheme (EIS) tax relief and a tax rebate are not the same, though they are related. EIS tax relief refers to the various tax advantages offered to investors in EIS-eligible companies, such as income tax relief, capital gains tax deferral, and loss relief. These incentives are designed to encourage investment in early-stage businesses.

A tax rebate, on the other hand, is a refund on taxes already paid. In the context of EIS, the income tax relief component can result in a rebate if it reduces your tax liability below what you have already paid.

Essentially, while EIS tax relief encompasses several benefits, a tax rebate specifically refers to the refund aspect of these benefits.
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