What do you want to know about EIS?
What is EIS?
The Enterprise Investment Scheme (EIS) is a UK government scheme that helps younger, higher-risk businesses raise finance by offering investors generous tax reliefs to investors. The EIS has been around since 1994, so is a well-established part of the UK tax landscape for investors.
Investors can claim EIS relief on up to £1m-worth of investments in qualifying companies per person per year (this cap rises to £2m if you're investing in knowledge-intensive businesses, such as those in the life sciences sector). Even better, the scheme's carry back feature means you can apply your EIS-eligible investments to the preceding tax year.
Since launch, the scheme has promoted more than £10bn of private investment. The success of this scheme led to the introduction of the Seed Enterprise Investment Scheme (SEIS), which promotes investments in even earlier-stage (and therefore riskier) companies through even greater tax relief.
Risk warning: Tax relief depends on an individual's circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status.
What is EIS tax relief?
EIS tax relief is a UK tax relief designed to encourage investment into younger, higher-risk companies.
Qualifying investors can take advantage of the various tax reliefs when investing into EIS-eligble companies, up to a cap of £1m per tax year, or £2m per tax year as long as at least £1m of this is invested in knowledge-intensive companies. These tax reliefs include:
- Income Tax relief of 30% of your investment. This can be used in the year of investment or carried back one year
- Capital Gains exemption on profits earned on shares held for a minimum of three years
- Loss relief, should the company you’ve invested in fail, equivalent to your tax bracket multiplied by your 'at risk capital' (the total loss on the shares once Income Tax relief has been accounted for)
- Capital Gains Tax (CGT) deferral on gains realised on the disposal of any asset which is reinvested in an EIS eligible company
- Inheritance Tax exemption on shares held for a minimum of two years
Income Tax relief
You can claim 30% tax relief on qualifying EIS investments up to a cap of £2m per tax year as long as at least £1m is invested in knowledge-intensive businesses, such as those in the life sciences sector.
This means if you invest £1m into EIS-qualifying opportunities, you can claim a tax reduction £300,000, provided you have sufficient Income Tax liability to cover it.
As EIS allowances are allocated individually, a married couple could be eligible to claim EIS tax relief of up to £2m in a single tax year (or up to £4m if investing in qualifying knowledge-intensive businesses). Income Tax relief is given at 30% of the investment, regardless of what your top rate of tax is.
The shares must be held for at least three years from the date of issue – tax relief will be given at the outset, but can be clawed back if you dispose of the shares before the three years are up.
There are complex rules around what type of company qualifies for EIS investment. While there is no way to guarantee an investment will be eligible for the EIS, companies can apply to HMRC for EIS ‘advance assurance’, which gives a provisional indication of whether or not a company may be eligible to apply for tax relief for its investors. There are also rules around investing in companies that you are connected to, so check these before investing in a company that you have links to.
EIS tax relief calculator
Please note: this calculator is for illustrative purposes only. Tax relief depends on an individual's circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status
Capital Gains Tax exemption
Any gains are free of Capital Gains Tax so long as you've held the shares for at least three years and have claimed at least some Income Tax relief on them. You can potentially accrue your Capital Gains Tax exemption for longer than three years as long as you continue to hold the shares.
Loss relief allows investors to offset a loss made on an EIS investment against either their Capital Gains Tax bill or their Income Tax bill, depending on which better suits their individual needs. They can claim loss relief either in the tax year when they realise the loss or the following tax year. This is in addition to other EIS tax reliefs.
While the below explains how loss relief works and how you go about making a claim, we suggest you get financial advice to help you fully understand your specific circumstances.
Does my investment qualify for loss relief?
To qualify for loss relief the value of an investment when it is sold has to have fallen below what’s called the 'effective cost'. The effective cost is the amount invested minus whatever you previously claimed in Income Tax relief. For example, if you invested £20,000 into an EIS-qualifying investment and you then claimed upfront Income Tax relief of £6,000 (equal to 30% of the amount you invested), the effective cost of that investment would be £14,000.
Negligible value claims
It should be noted that as well as being able to claim relief for the loss on a liquidation of the company, it is also possible to make a 'negligible value' claim where the value of the investment has dropped to a negligible amount.
In the event of an investment losing value, there are attractive reliefs for EIS (and SEIS) investors. If the shares have negligible value, a claim can be made for relief even when shares are still owned. If the company has been liquidated, a decision must be made on whether to make an election to set the loss against income, and if so, whether you want to set it against your income in the tax year of the loss or the previous tax year. It is important that tax claims and elections are made before the relevant deadlines.
Claiming loss relief against Income Tax
Investors in EIS-eligible investment opportunities may be able to offset losses against their Income Tax bill for the current or previous tax year under ITA 2007, Section 131. With Income Tax rates typically being higher than Capital Gains Tax rates, most investors elect to set any loss made against their income and claim relief at up to 45%.
You can work out the amount of relief you can claim by multiplying the value of your effective loss by your marginal rate of Income Tax.
Claiming loss relief against Capital Gains Tax
Alternatively, you may want to offset your loss against your Capital Gains Tax bill for the current or future tax years. In this case, the relief can be calculated by multiplying the effective loss by the rate at which you pay Capital Gains Tax.
EIS tax relief examples
The company in which you invested goes bust. Your shares are worth £0, but you receive loss relief
TOTAL LOSS: £3,850*
You sell your shares for £10,000 after 3+ years
TOTAL GAIN: £3,000
If after 3+ years you sell your shares for £20,000, you'll owe no Capital Gains Tax on profit
TOTAL GAIN: £13,000
*You receive loss relief from the government equal to your at-risk capital (in this case the £10,000 invested - £3,000 received in Income Tax relief), multiplied by the percentage tax bracket you belong to. At a tax bracket of 45%, the loss relief would be £7,000 x 45% = £3,150. So, for £10,000 invested, your real loss is £7,000 - £3,150 = £3,850
EIS carry back
It is possible to 'carry back' all or part of your EIS investment to the preceding tax year as long as the limit for relief is not exceeded for that year. (The limit for EIS is £1m per tax year, rising to £2m provided £1m of this is invested in knowledge-intensive companies.)
This means that you can make a subscription of £3m EIS shares in 2017/18 with a carry back of £1m to 2016/17 so long as your EIS cap for 2016/17 is not exceeded.
Capital Gains Tax (CGT) deferral relief
If you have capital gains greater than the annual exemption, these can be deferred by making an EIS investment. Capital Gains Tax deferral relief freezes the gain, and the tax liability is deferred until the EIS shares are disposed of, although a further EIS investment can be made when that happens, to defer the tax liability again. Gains deferred in this way wash out on death.
Gains arising up to three years before, and one year after, the EIS shares are issued can be deferred and there is no limit on the amount that can be invested.
While the standard EIS rules state you cannot claim tax relief on investments into companies with which you are ‘connected’ by significant financial interest or employment, these rules do not apply where only deferral relief is claimed.
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Claiming your EIS tax relief
Before you can claim EIS tax relief you must have received an EIS3 form from the company in which you have invested. This form confirms the amount you invested and states that the investment is eligible for tax relief. HMRC may ask to see your EIS3 form even after your taxes have been processed, so be sure to keep it safe.
Your claim can be made on the Self-assessment tax return for the tax year in which the shares were issued. If the shares were issued in a previous year, and/or if the claim is for capital gains deferral relief, the claim part of the form must also be completed and sent to your tax office. Claims for relief can be made up to five years after the first 31 January following the tax year in which the investment was made. Carry back is possible on all or part of the investment to the preceding tax year if the limit for relief has not already been exceeded.
For full details, see the HMRC Guidelines.
Once you have your EIS3
This following guide assumes you complete your own tax forms. If you have an accountant, you’ll simply send them your EIS3 form and let them do the rest. If you are employed under PAYE, the process is different (see below).
Many investors keep track of their investments through a simple Excel sheet to make the process easier when it comes to claiming EIS relief. HMRC will require the following information:
- The names of the companies in which you’ve invested
- The amounts, per company, for which you’re claiming relief
- The date the shares were issued (often different from the date you invested)
- The HMRC office authorising the issue of the EIS3 certificate and its reference (as shown on the certificate)
Collating the above information in an Excel sheet will enable you to sum up the total amounts invested, which is an additional figure you will need to enter into your tax return.
In addition, if you have subscribed to more than £1m worth of shares, you will need to define how you want the relief attributed to these shares. Remember, the limit for EIS investments is £2m, provided that anything above £1m is invested in knowledge-intensive companies.
Filling in the form
If you’ve done your preparation, compiled all of the information outlined above and have your EIS3 forms to hand, claiming a rebate on your taxes is a fairly straightforward process.
Go to the section of your tax return titled ‘additional information’
In box Number 2 on Page 2, you will need to enter the total amount you invested into EIS companies for which you will make a tax relief claim
Go to Page 4 and in the large box, where it asks ‘Please give any other information in this space’, you will need to enter the information from your Excel sheet as outlined above – i.e. company names, the amounts for which you're claiming relief, the share issue date and the HMRC office issuing your EIS3 certificate
You do not need to complete pages 3 or 4 of the EIS certificate and you do not need to send the EIS certificate to HMRC along with your return. However, as mentioned above, HMRC may request to see it to support your claim so do keep it in a safe place
If you're employed under PAYE
If you are employed under PAYE or for any other reason do not normally complete a tax return, the process for claiming EIS relief is slightly different. You will need to fill in pages 3 and 4 of the EIS certificate and send these by mail to the HMRC officer dealing with your tax deductions.
If you’ve invested into an EIS fund and the fund was approved by the HMRC, you only need to make one claim on your tax return for the entire amount invested into the fund. If the fund was not approved, you will have to make individual claims for your allocated investment into every company that the fund invested in.
Here’s how the process of obtaining EIS certificates works.
The company gets EIS advance assurance from HMRC before it starts a fundraise. HMRC never guarantees that a company will certainly qualify for EIS, but an advance assurance is the closest to it you can get. You can usually download a copy of the company’s advance assurance letter from the deal page
Once the funding round is successfully completed and shares are issued, the company sends an application to HMRC (referred to as an EIS1) asking to grant investors EIS tax relief. It usually takes HMRC around three months to process this application
HMRC then sends the company blank EIS3 forms (the certificate that you receive), which the company completes and returns to you. You can attach these forms to your tax return to claim relief if you are eligible to do so
The full process of obtaining an EIS certificate for an investment can take three to four months.
EIS rules for investors
In order to qualify for Income Tax relief, you cannot be ‘connected’ to the investee company by significant financial interest or employment. These conditions must be true for the duration of a period starting two years prior to the EIS share issue and lasting until three years after the investment is made.
You are recognised as being connected to the company if you are a paid company employee, partner or director. The exception is if you are an unpaid director of the company, in which case you may still claim Income Tax relief.
You are also connected to the company and therefore ineligible to receive Income Tax relief if you have a 30% or greater interest in the company or any subsidiary (this includes share capital, voting rights and the rights to assets).
No partner or associate of the investor may have other interests in the company.
The information on this page does not constitute financial advice and is provided on an information basis only, based on research using the following sources:
- HMRC self-assessment helpsheet
- EIS Association website
- HMRC policy paper on EIS and knowledge-intensive companies
- UK Business Angels Association guide to EIS
Tax-efficient investing in a digital world
Want more information about how the EIS is impacting UK investing? Download your copy of our free guide. Featuring an analysis of UK investor trends, EIS case studies and a four-page EIS cheat sheet.