EIS Tax Reliefs

Investors can claim up to 30% income tax relief on EIS investments up to £1 million per tax year (extending to £2 million should all investment over the original threshold be invested into knowledge intensive companies [KICs]) should shares be held for at least three years.

Reducing some of the risk traditionally associated with investing in early stage companies by claiming a proportion of the EIS investment back in income tax relief, this advantage alone offers investors the potential to claim up to £600,000 back in tax per annum (providing income tax eligibility criteria is met).

As well as being able to claim income tax relief for the year that the investment was made, through EIS carry back relief, should an investor instead wish to treat the 30% relief as if was made in the previous tax year (to suit personal tax panning circumstances) they can do so.

Income Tax Relief Example

Should an investor pledge £50,000 into an EIS investment opportunity, once their EIS3 certificate has been received (distributed upon the issuing of shares), they will be able to claim up to £15,000 of that sum back via a deduction from that or the previous tax year's income tax bill.

Claiming EIS income tax relief is a relatively straightforward process that can be completed by either applying for and filing a self assessment tax return (should you pay tax solely through PAYE), or by entering the details of your EIS3 form upon completion of an annual tax return (if you are a business owner or self-employed). 

EIS capital gains tax relief offers investors the opportunity to generate considerable tax-free growth over time by making any gains realised on the value of EIS shares 100% CGT-free at the point of disposal (a relief shared by its sister scheme, the Seed Enterprise Investment Scheme).

Negating the usual UK CGT liability of 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers due upon the point of disposal, EIS CGT exemption can act as a powerful advantage for maximising returns when compared to many traditional equity routes.

CGT Exemption Example

Should an investor pledge £50,000 in an EIS investment opportunity, and their shares be valued at £150,000 upon the point of disposal, the £100,000 gain (that would usually be liable to a £20,000 deduction) will be completely capital gains tax-free.

In order to qualify for EIS capital gains tax exemption, shares must have been held for at least three years from either the date of issue or commencement of trading (whichever is later), and the company must remain EIS-eligible for at least that three year period.

When claiming EIS capital gains tax relief, the gain does not need to be included in your usual disposal proceeds (being an exempt gain and automatic relief), but the details should be included in the 'Any other information' section of your capital gains summary form should you file an annual tax return.

One of the lesser-known, but perhaps most advantageous of the EIS's tax reliefs, EIS deferral relief allows investors to defer a payment of CGT that has arose from the sale of any other asset (providing the gain is invested into EIS-eligible shares).

This effectively means that investors can treat gains they have acquired from shares, property sales, or any other chargeable asset as though they had been acquired in future years, offering investors the power to reorganise their tax liabilities to best make use of annual tax allowances and personal circumstances. 

CGT  Deferral Example

Should a higher/additional rate taxpayer sell a property and make a capital gain of £100,000, where usually that individual would be required to pay £28,000 of their gain in CGT (28% on property), EIS deferral relief will allow them to receive the full sum of the gain and defer the CGT due to a later year.

In order to qualify for deferral relief,  HMRC state that the gain must be invested into EIS-eligible shares within one year prior or three years after it arises. The gain will cease to be deferred when the EIS shares are sold, and there is no upper limit to the value of gains that can be deferred.

To claim EIS deferral relief you can either complete the claim form attached to your EIS3 certificate and attach this to the capital gains summary page of your annual tax return (should you be eligible for one), or by completing a HMRC online self-assessment form should you PAYE, stating your wish to defer the gain.

Another tax advantage shared by both the EIS and SEIS, inheritance tax relief allows investors to pass on EIS shares inheritance tax-free, without being liable to the usual 40% IHT rate due in the UK on estates valued over £325,000. 

A powerful tool for minimising inheritance tax liabilities when planning for later life - providing the investment was made at least two years before passing - EIS IHT relief has the potential to minimise capital erosion and maximise the proportion of an estate that is inherited. 

IHT Exemption Example

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.

IHT relief is obtained by claiming business relief (BR). A claim for BR is normally made during the settlement of the shareholder’s estate, whereby the executors will need to complete a copy of probate return form IHT 412 and return this to HMRC as part of the overall probate process. HMRC will then assess the claim.

Among the less understood of the scheme's tax reliefs, EIS loss relief provides investors with a safety net should an unexpected event arise with their portfolio company, offering them the ability to offset any potential loss realised on their EIS investment against their marginal rate of income tax or capital gains tax.

By offsetting a potential loss against their income tax bill for the current or previous tax year, or instead against their CGT bill for the current or future years, loss relief allows investors to mitigate some of the risk associated with investing in startups and scaleups.

EIS loss relief is calculated by multiplying your effective loss (the value you originally invested minus the return you realised and value of income tax relief you claimed) by either your marginal rate of income tax or rate of capital gains tax (dependent on which route you choose).

EIS Loss Relief Example

Should a higher rate taxpayer investor invest £50,000 in an EIS opportunity, of which they have already claimed £15,000 back in income tax and only realised £5,000 in returns, they could then multiply their effective loss of £30,000 by their 45% rate of income tax to claim back a total of £13,500 in loss relief.

Though there are a number of caveats to be aware of when claiming EIS loss relief, essentially investors can claim loss relief by completing the SA108 form on their annual tax return. To report on this section, investors must complete the 'Unlisted shares and securities' section, stating the effective loss to offset against income.