We all know that investing in startups is risky. For this reason, it's important to create portfolios, spend a lot of time conducting detailed due diligence before investing, snd, of course, we should only invest an amount we can afford to lose.
But just how much one can afford to lose when they take into account all of the EIS loss reliefs is a subject few delve into. While many investors are aware of the generous 30% income tax relief that the Enterprise Investment Scheme (commonly referred to as EIS) offers on investments, there is less noise made about the even more generous loss relief EIS affords.
In fact, for 45% taxpayers this loss relief can amount to more in tax relief than the initial 30% income tax relief they receive. Combined, the initial income tax relief and loss relief cover a large portion of an EIS eligible investment should it not go the way investors hope.
Loss relief and EIS, the great equaliser
The loss relief afforded through EIS reduces that total amount an investor can lose on a given investment. The loss relief comes into play when an EIS eligible company goes into liquidation, or when the value of the shares become negligible.
When this occurs an investor can make a claim for loss relief on the shares. While most losses on investments can only be used to offset capital gains elsewhere, the loss relief from EIS is special and can be applied against income tax or a capital gain, it’s the investors choice.
When all of the tax reliefs are taken into consideration, the initial income tax relief and the loss relief, an investor who pays income tax at the 45% rate is effectively covered for 71.5% of their investment. Therefore on an investment of £10,000 the 45% tax rate payer will lose £3,850 should the investment go bust and all relevant tax reliefs be claimed.
How to calculate your EIS loss relief, an example
To calculate your the amount of loss relief you can claim you need to know a few things:
- How much you invested in EIS
- How much initial income tax relief you claimed
- Your income tax rate (likely 40% or 45%)
Let’s say that Robin, a 45% tax rate payer, made an EIS eligible investment of £10,000 into Sam’s Widgets in 2019. While Sam had a great idea and early traction the business struggled to turn a profit and in 2023 they went into liquidation.
Once Robin has received notification of the liquidation she can make her claim for loss relief.
To calculate how much Robin can claim you start with the £10,000 investment and subtract the 30% (£3,000) initial income tax reducation
£10,000 - (10,000 * .3) = £7,000
The £7,000 figure represents how much capital Robin has “at risk” after the initial income tax relief is taken into account.
To find out how much she can claim in loss relief Robin multiples the at risk amount by her income tax bracket which we know is 45%
£7,000 * .45 = £3,150
Therefore Robin can make a claim for loss relief of £3,150 which she can use to reduce her income tax bill or offset a capital gain elsewhere. She decides to apply it against income tax and reduces that amount she owes on her 2023 tax return by £3,150
It is worth noting that Robine could also apply the loss relief against income for her 2022 tax return. However, she can only apply it against a capital gain that arose on the 2023 tax return, their is no carry back when applying the loss against a capital gain.
In the scenario above Robin has received a total of £6,150 in income tax relief. Her net loss on the £10,000 invested into Sam’s Widgets is £3,850.
How to claim EIS loss relief
The easiest way to claim EIS loss relief is as part of your self assessment tax return, by claiming the losses against either income tax or capital gains tax.
To do this you need to fill in the SA108 form which accompanies the main SA100 form.
You must claim the EIS loss relief in the “Unlisted shares and securities” section of the form, as seen below, paying particular attention to boxes 41 - 44.
Make sure to specify the source of the loss. You’ll also need to highlight the year of the loss and which years the loss should be applied to.
You must make the claim no more than a year after the 31 January deadline of the following tax year. For example, if the loss occurred in the 2021/2022 tax year, you would need to claim by 31 January 2024.
If you don’t complete a self assessment tax return you must write to HMRC to claim loss relief.
PAYE & Self Assessment, HM Revenue and Customs, BX9 1AS United Kingdom
You need to give the name of the company, the date, amount invested and number of shares purchased, and the same for when the shares were sold or the company dissolved.
Negligible value claim
In the example scenario explained earlier we stated that Robin needed to wait for the liquidation report to make her claim for loss relief. There is in fact a way to make a loss relief claim before a company has entered into administration. This occurs when it can be proved that the shares held are of negligible value.
A negligible value claim allows you to treat an asset as being disposed of, even though you still own it. To make a claim of negligible you must provide details of your negligible value claim in box 54, ‘Any other information’, on page CG 4 of the Capital Gains Tax summary (SA108) or in your computations included with your tax return.
If you are making the negligible value claim in your tax return then you can also include the calculation of the loss with the return. Include the loss in boxes 7, 19, 27 or 35 of the Capital Gains Tax summary (SA108), as applicable, and use code ‘NVC’ in boxes 8, 20, 28 or 36, as applicable, and provide an accompanying computation.
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