The Enterprise Investment Scheme (EIS) was introduced in 1994 to help smaller, higher-risk unquoted companies raise finance by offering a series of tax reliefs to new investors, thereby helping lessen the amount of investor capital at risk. At its core, EIS is one of the most generous tax relief schemes in existence.
EIS lets you invest up to £1m – now £2m if in knowledge-intensive businesses (see later) – in any tax year and receive 30% tax relief on your initial investment. It offers additional loss relief while allowing investors to roll over existing capital gains tax and give wealthier investors the chance to delay or even avoid inheritance tax.
How do I claim EIS relief?
If you’ve done your preparation and have access to your EIS3 forms, claiming relief 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 stated in the bullet points below.
- You do not need to complete Pages 3 and 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.
- The names of the companies you’ve invested in
- The amounts, per company, for which you’re claiming relief
- The date the shares were issued (often not the day you invested)
- The HMRC office authorising the issue of the EIS3 certificate, and their reference (as shown on the certificate)
What happens if an EIS investment fails?
By their nature, EIS investments are risky. Accordingly, as well as giving an exemption from capital gains tax, any loss suffered (net of income tax relief) can be claimed as a capital loss to set against capital gains of the same year, or to be carried forward to set against gains in future years. Alternatively, a generally more attractive choice is to elect for the loss to be set against income of the current or prior year under ITA 2007, section 131. Below is an example.
Initial investment £10,000; the enterprise goes bust and nothing received on liquidation.
Please note that the rate at which you receive loss relief depends on the tax band you’re in, i.e. you’ll get 45% of your capital at risk back if you’re in the 45% tax band. Assuming the investor has income taxed at 45%
EIS investment: £10,000
Income tax relief at 30%: £3,000
Net cost to investor: £7,000
Loss relief £7,000 x 45%: £3,150
Cost to the investor after tax: £3,850
How can I obtain EIS certificates?
- Once the funding round is successfully completed and shares are issued, the investment platform 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 investors receive), which the company typically completes and returns to you, the investor. You can then attach them to your tax return to claim relief if you are eligible to do so.
Please note that the full process of obtaining an EIS certificate for an investment can take a few months.
Can I carry back EIS relief?
Yes. Income tax relief can be claimed in the year of investment, or the previous year. This means that if you have a tax liability for the previous tax year, you can mitigate this by making an EIS investment in the current tax year and carrying it back.
There are complex rules around what type of company qualifies for EIS investment, so you should always check that the company has an ‘advance assurance’ from HMRC.
What is the maximum EIS investment?
The maximum annual investment limit into EIS-eligible companies is £1m, except for ‘knowledge-intensive’ companies, for which this limit is £2m, as outlined in the 2017 Autumn Budget by Chancellor Philip Hammond.
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.
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About the Author
Tom Britton is co-founder of SyndicateRoom where he leads the technology development team. Tom’s knowledge of the SyndicateRoom network of investors and their use of the platform is especially detailed. Published by Bloomberg, his insight is valuable for its subtlety and nuance.
Before joining SyndicateRoom Tom worked in product development on a number of software-based projects including managing the development of the mobile applications for TheTrainline. He is a certified PRINCE 2 project manager and has a wide range of first-hand coding experience to bring to the table.
Born in Los Angeles, Tom moved to the UK to play football and after three fairly successful years realised it was time to focus on his non-sporting career. Tom completed his MBA at Cambridge where he focused on developing start-ups and has taken a keen interest in ventures focused on helping other start-ups. In his spare time he volunteers for Camp Footprints, rock climbs, and still plays the odd five a side game.