EIS is a popular investment for a number of reasons, one of those reasons being the suite of generous tax reliefs the scheme offers.

However, many investors fail to plan ahead and end up making their investment in EIS too late to claim tax reliefs for their incoming tax filing, instead having to wait until the following tax year.

If you pay tax to HMRC there’s a good chance the EIS is open to you, but it’s always worth checking your circumstances will qualify before you invest.

Here are the key things to keep in mind so that you can get your investment done ahead of time, and claim as much as possible in your next tax return.

Deployment takes time.

With most funds, investment – actually sending your money to the fund – is a relatively quick and simple process. It’s the deployment of your funds into startups that can take a little time. Exactly how much time can vary from fund to fund, but depending on the size of the portfolio, it can take anything from a few weeks to 15 months to reach full deployment. (Most funds will take at least 12 months; only a very few, who invest into a limited number of companies will take a few weeks.)

Why does it take that long? The fund has to source deals, vet companies, check EIS viability, process legals and financials and more for each company they invest in.

Why does deployment matter? It’s only after your funds have been deployed into a company that you can receive your EIS share certificate for that company, and you need to have received this in order to be able to claim tax relief on those shares.

If you wait until a few weeks before the tax year ends to invest, you are unlikely to have many shares certificates issued for that tax year.. Keep reading to find out why that can be a problem.

Carry back.

EIS offers a range of tax reliefs, one of the most attractive of them being income tax relief. Investors can claim 30% of their invested amount back as relief on their income tax bill. Crucially, this also has a carryback option, which means that investors can claim on the year in which their shares were issued, or, they can apply the relief to the previous tax year.

For example. If it was the 22/23 tax year, and you were hoping to claim carryback for the 21/22 year (this is the filing that HMRC would request in January 2023) you would need to have shares issued in the 22/23 tax year to carry back the relief to 21/22. The 22/23 tax year filing wouldn’t be requested until January 2024.

If, however, you only invest in March 2023, with the exception of one or two funds who don’t build diverse portfolios, very few of your fund’s investments will complete in time for your shares to be issued in the same tax year. Most of your shares would therefore be dated for the 23/24 tax year, and you would have missed your chance to carry back your relief to 21/22.

Because HMRC expects filings for the previous tax year every January, the best way to ensure you have shares issued to claim on by the time January rolls around is to invest as close to the start of that tax year as possible. Invest in April 2023, and when January 2024 arrives, it is much more likely that you will have had shares issued for 23/24. You can then apply the tax relief on these shares to your 22/23 filing using carryback.

Also note that you can still claim for EIS shares issued after you have submitted your filing, between January and the end of March 2024. EIS certificates include a form to submit a claim, or you can submit a correction to HMRC informing them that you have additional shares to claim on.

Using your options

The key thing to remember is that investing in EIS gives you options and flexibility around reducing your tax bill that those without an EIS investment don’t have. Investors in EIS are able to plan ahead and offset any spikes in income tax with their EIS tax reliefs, timing their investment in order to apply their relief to the previous or current tax year.

Investing early in the tax year essentially means you get to apply your tax relief sooner, specifically in relation to the tax return arriving in the coming January, instead of waiting until the next tax return in the following tax year.

This is particularly useful if you’re expecting to receive a bonus in any given tax year, as you can plan your tax relief accordingly.

Start planning now

Do you know what your income tax will be for the tax year gone? In most cases, when people are paid through PAYE, it’s pretty straightforward. If you have additional sources of income, be it through renting property, receiving royalties, interest or whatever it might be, sometimes it’s harder to know what your tax bill will be.

If you want to get a sense of your upcoming bill, based on current allowances, we’ve found the government's own tool provides a very [useful guide] (https://www.gov.uk/estimate-income-tax).

Tailor your investment to the amount you want to claim

Because EIS allows you to claim 30% of your invested amount against your income tax bill, many investors aim to invest a sufficient amount so that 30% covers most, if not all, of their income tax.

The maximum amount you can claim on is £1,000,000 (this rises to £2,000,000 if £1m of your investment is invested in Knowledge Intensive Companies), so you can claim up to £300,000 (or £600,000) in relief.

For funds, reduce your expected tax relief about by about 10% to account for the fund fees. For example, if you invest £10,000 into a fund you’ll likely be able to receive around £2,700 in tax relief, not £3,000.

Invest, sit back, claim the relief, and wait

Investing into startups is a long term process and portfolio failures will occur far earlier, and more frequently than successes. So, if you’ve decided to invest, be sure to collect your EIS certificates, make your claim for relief, and then settle in for the ride.

With luck, and the right fund strategy, despite the failures along the way, you will see successes and returns in addition to your tax relief. On top of that you’ll know you’ve helped the economy by creating jobs and supporting innovation.

If you’d like to find out more about the Access EIS Fund, which uses a data-driven co-investment model to build large portfolios of 50+ companies for investors, click here.

The Access EIS Fund

Our fund co-invests with proven angel investors to build large portfolios of hand-picked companies for our investors. It’s a high risk investment, and we can’t guarantee that every startup will be a unicorn, but we’re confident that our approach is the smartest on the market. Even better, we can show you the data to prove it.

If you’re interested and would like to find out the benefits of investing towards the start of the tax year, you can call us on 01223 478 558 and we'll be happy to answer any questions you might have.

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