The UK government recognises both—the vital role successful startups play in driving jobs, innovation, and economic growth and the risky nature of investing in small, unquoted companies. It is either gain or lose. The Enterprise Investment Scheme (EIS) was introduced for this purpose.
In this guide, UK investors will learn about the various types of EIS investment tax relief, including loss relief, how to claim, and more.
What Is EIS Investment Tax Relief
The Enterprise Investment Scheme (EIS) started in 1994 and is one of the venture capital schemes that aims to make unquoted companies attractive to investors through huge tax breaks. Its counterpart, SEIS, supports younger startups. EIS, on the other hand, focuses on growing, medium-sized businesses, generally allowing the latter to raise funds of up to £12 million over their lifetime.
Whilst investors do not normally put their stake in high-risk investments, EIS gives them massive tax relief, specifically on:
- Income tax
- Capital gains tax (CGT)
- Inheritance tax
These tax incentives attract angel investors to buy shares from EIS-eligible companies, helping the latter raise equity funds for their development and growth. If they sell their grown value of SEIS shares, they pay no CGT. Moreover, if the investment fails, they can claim loss relief. See below for more information on how EIS investment tax benefits work.
However, whilst investing in EIS-qualifying companies is tax-efficient, the risks remain. The reliefs only serve as risk mitigation. Investors may still lose some or all their investments. Eligibility for EIS tax relief is also compliance-based. Both investors and companies must continually meet all the EIS rules and conditions to be able to take advantage of the full tax relief.
It is highly advisable for investors to employ financial advice fiduciaries to serve as their investment intermediate. These professionals can help them choose which EIS companies to invest in, advise them on the most tax-efficient approach, and provide them with results-driven investment strategy overall.
See relevant article: SEIS Tax Relief 2024.
Who Qualifies for EIS Investment
Investors who aim to qualify for EIS must meet the following criteria:
- They are UK taxpayers.
- They are not employees or directors of the company.
- They are not related to other associates, such that they are not business partners, spouses, relatives, etc.).
- They are not a substantial stakeholder in the company, with no more than 30% of the company’s total shares.
- They do not hold other shares in the stock market or are not under SEIS or EIS, only except for subscriber shares.
To obtain the full investor relief, they must comply with these conditions:
- Their investment must pose legitimate risk, such that they do not intend to exchange their investments with tax relief to avoid their tax liability.
- They invest within the annual EIS limit, which is £1 million for most businesses. If they also invest in knowledge intensive companies (KICs), they can invest up to £2 million in a tax year.
- They pay for the shares upfront.
- They hold the shares for a minimum of three years, not receiving any ‘value’ (no dividend, interest, etc.) from the company throughout.
EIS rules may change at any time. It is highly recommended for investors to work with a fiduciary investment adviserto ensure tax efficiency in every step and ensure they are fully compliant to be able to take advantage of full tax relief.
How Does EIS Tax Relief Work
Angel investing in EIS-eligible companies provides huge tax incentives. Here are how they work:
Income Tax Relief
EIS allows investors to claim up to 30% income tax relief on their investments. For instance, if they make an investment of £100,000, they could get a tax deduction of £30,000 (30% of £100,000), provided they meet all the conditions.
That is, investors must have held the shares for at least three years and the investee company must remain EIS-eligible throughout. If their income tax liability is insufficient, they can carry the relief back to the previous tax year, potentially doubling the maximum investment to £2 million under certain conditions.
Capital Gains Tax Relief
Capital Gains Tax (CGT) exemptions and deferrals are another significant advantage of the EIS. Any growth in the value of EIS shares is entirely tax-free if the shares are held for at least three years and income tax relief has been claimed.
Moreover, gains from the sale of other assets can be reinvested in EIS shares to defer the CGT, with no upper limit on the deferred amount. This deferral can last, provided the EIS shares are held. If the deferred gain is reinvested in new EIS shares, the deferral can continue, effectively managing and potentially reducing the investor’s overall tax burden.
Inheritance Tax Relief
EIS shares are considered like any other shares in the stock market. However, if they were held for at least two years at the time of the investor’s death, EIS shares can be passed on to beneficiaries free from inheritance tax. HMRC will not claw back any tax relief payment. This makes EIS investments a huge tool for estate planning.
How Does EIS Loss Relief Work
EIS loss relief enables investors to offset losses against their income tax or CGT for the current or previous tax year. Investors are only eligible for this relief when their investment’s realised value has dropped below the ‘effective cost,’ which is the amount invested minus the income tax relief already claimed.
They must have sufficient tax liabilities to offset the loss and must claim within specific time limits. To calculate, the allowable loss is multiplied by the marginal rate. The relief will be based on the investors’ income tax rates:
- Basic rate – 20%
- Higher rate – 40%
- Additional rate – 45%
Take, for instance, a loss offset against income tax:
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EIS Investment: £10,000 |
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Sale Value: £2,000 |
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Allowable Loss: £8,000 (£10,000 - £2,000) |
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Marginal Tax Rate: 45% |
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Income Tax Relief: £3,600 (£8,000 x 45%) |
On CGT, the relief is based on which CGT bracket the taxpayer belongs to. Using the same example above, with the taxpayer paying the additional rate, a loss offset against CGT would result in the following:
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Allowable Loss: £8,000 |
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CGT Rate: 20% |
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CGT Relief: £1,600 (£8,000 x 20%) |
See Capital Gains Tax Calculator on UK Property & Asset Sales for more details.
When to Claim EIS Tax Relief
When can I claim EIS tax relief? This aligns with the online self assessment filing deadline, which is 31 January. Investors have five years from their first tax return filing to claim tax relief.
Investors must take note that they cannot carry the EIS limit forward into the next year (£1 million for most businesses; £2 million for knowledge intensive companies). But they can carry back the relief to the previous tax year, allowing them to invest double the normal EIS limit, up to £2 million.
How to Claim EIS Tax Relief
How to claim EIS tax relief for previous year? Claiming income tax relief is done via filing self assessment or sending EIS certificate (where they complete a form) to the local tax office. Generally, investors can claim both tax relief and losses against their CGT and income tax by filling in the relevant part in their self assessment.
Read A Comprehensive Self Assessment Guide for Beginners for more information about how to file annual self assessment tax returns.
Other EIS Tax Relief FAQs
EIS income tax relief is fully withdrawn or reduced if the investment fails to meet the qualifying conditions within three years. This is done through an income tax assessment for the year the relief was initially claimed.
No. EIS relief can only be claimed for the current or previous tax year.
To qualify for deferral relief, investors must reinvest in EIS-qualifying shares within three years or 12 months before the original gain. The deferred gain becomes taxable if the EIS shares are sold within this period.
When an asset becomes worthless during ownership, investors can make a negligible value claim to be treated as having disposed of it whilst still retaining ownership. The claim is effective upon receipt, even if submitted via a tax return, and requires that the asset must have become of negligible value whilst owned and still be owned at the time of the claim.
Investors in EIS–qualifying companies can receive up to 30% income tax relief on investments up to £1 million annually. This limit increases to £2 million if over £1 million is invested in knowledge intensive companies.
Why Our EIS and SEIS Services
EIS investment tax relief can only be obtained in full when both the investor and company remain EIS compliant. It is worth noting that EIS reliefs only mitigate risks, not fail-proof the investment. Before putting your stake in an unquoted company, you need a trusted investment advisor by your side.
Legend Financial is here to help you employ every tax-efficient strategy applicable to your investment situation. Our tested and proven strategies will help you maximise your tax savings. From finding the best EIS investments to claiming your tax and/or loss reliefs, talk to our SEIS and EIS consultants today!
