EIS tax relief: guide for investors

For many angel investors, nothing beats the thrill of finding a startup with huge growth potential.

Even better, because successful startups drive jobs, innovation and the overall economy, the UK government encourages private investment into high-risk, high-potential startups. They do this by providing attractive tax benefits through the Enterprise Investment Scheme (EIS).

Let’s take a look at the types of tax relief you can access as an investor can access under EIS, including Income Tax relief, Capital Gains Tax exemptions. Plus we’ll break down which companies you can buy into and how to claim your EIS tax relief.

What is EIS tax relief?

EIS is one of the UK government’s venture capital schemes. It incentivises private investors to put money into smaller companies.

Younger companies tend to be higher risk for investors. There’s less information to figure out if you’re making a good bet.

To offset this risk, EIS rewards investors with tax relief when they take a chance on young, medium-sized companies.

And the great thing is, you can claim tax relief from multiple venture capital schemes in the same year. So, for example, you can claim both EIS and SEIS tax relief at the same time.

How does EIS tax relief work?

There are several different ways you can claim tax relief through EIS.

EIS and Income Tax relief

Under EIS, you get back 30% of the amount you invest as a reduction in your Income Tax bill.

For example, say you invested £10,000 in an EIS-eligible company. When you file your tax return, you list the details of your EIS-qualifying investment to reduce your Income Tax bill by £3,000

Capital Gains disposal relief

When you come to sell your shares, usually you’d pay Capital Gains Tax (CGT) on the profit you make. With EIS, you get to keep it all.

Capital Gains deferral relief

You can use EIS to defer payment of an existing Capital Gains Tax (CGT) charge to a later year. By reinvesting the profit made from another asset into an EIS-qualifying company, you can treat the gain as if it occurred in a later year. This can be helpful in optimising your tax liabilities and allowances.

Under the EIS Capital Gains deferral relief rules, you can use your chargeable gains to invest in EIS shares up to one year before or three years after you’d otherwise pay CGT on it.

Loss relief

If you haven’t made a profit when you come to sell your shares, you can set that loss against your Income Tax bill. See an example of how that works on this gov.uk page.

Inheritance Tax relief

EIS shares aren’t subject to Inheritance Tax, so long as they have been held for 2 years.

EIS tax relief examples

How to qualify for EIS tax relief

To benefit from EIS tax relief, you have to be a UK taxpayer.

There are various rules for both companies and investors. These rules exist to protect the spirit of the scheme – to reward investors for taking a risk on a company that’s otherwise unconnected to their own financial interests.

EIS rules for investors

• the investor can’t be an employee or substantial stakeholder (over 30%) in the company
• the investment must represent a genuine risk to the investor. That means no agreements to swap investments for the tax relief, or other tax avoidance practices
• there’s a cap to the amount you can invest under the EIS scheme per year across all EIS-eligible companies. It’s £1M, or £2M if £1M of that is invested into KICs
• you must pay for the shares upfront
• you have to keep the shares for at least three years, and you can’t receive ‘value’ from the company during that time (see box below)

See EIS rules for investors for a full explanation of the rules.

What companies can you invest in under EIS?

EIS rewards investors for supporting medium-sized startups.

To be eligible for SEIS, companies must:

• have been trading for less than 7 years from the date of their first commercial sale (10 years for KICs)
• employ fewer than 250 people (500 for KICs)
• have no more than £15M in gross assets
• have a permanent establishment in the UK
• not carry out an excluded trade. This includes banking, insurance or property development

For full details, see our article for startups on the EIS company criteria.

When can you claim EIS tax relief

You can claim EIS tax relief up to five years from the 31 January that follows the tax year in which you made the investment. It’s 31 January because that’s the deadline for Self Assessment tax returns.

If you don’t use all of your EIS allowance (£1M per year), you can’t carry forward the EIS limit to the next year.

But you can carry back EIS tax relief to the previous year, if you haven’t already invested the maximum allowed under the scheme in that year.

How to claim EIS tax relief

The investee company completes the EIS compliance process

So, you’ve found EIS-eligible companies, checked they have EIS Advance Assurance, completed the negotiations, and invested.

What happens next? How do you actually get the tax relief you were promised?

 1. The investee company fills in a compliance statement (EIS1 form)

There are a few limits over when the company can complete the compliance steps. HMRC accepts compliance statements after the company has carried out their qualifying business activity for at least four months.

 2. HMRC sends back two confirmation documents for the company to pass on to investors (EIS2 and EIS3)

Typically, HMRC reviews the company’s compliance application in about 15 to 40 working days.

To approve EIS-qualifying status, HMRC sends the investee company two documents:

• EIS2 – this is a letter containing the Unique Investment Reference (UIR) number for this share issue. The company needs to tell you their UIR so you can claim tax relief as an investor.
• EIS3 – this is a blank EIS compliance certificate. The company fills it in for each of their investors (with the UIR) and sends it to you. The EIS3 is proof that your investment is eligible for EIS tax relief.

You claim tax relief through your annual self assessment tax return

As an investor, you claim your EIS tax relief when you fill in your annual Self Assessment tax return. On the Additional Information page, under ‘Other tax reliefs’, enter the total you’ve invested in companies under EIS (and any other venture capital scheme you’re applying for).

How to claim EIS loss relief

If things don’t go as planned and you make a loss on your investment, you can claim loss relief. Loss relief allows you to offset a loss, minus any income tax relief you’ve already had from HMRC, against your income.

If you’re claiming the loss for the current tax year, you can contact HMRC to request a change to your PAYE tax code or make an adjustment to your Self Assessment tax payments.

If you’re claiming the loss for the previous tax year, make the claim on your Self Assessment tax return. See full details on how to claim SEIS/EIS loss relief at the gov.uk website.

When can you claim EIS loss relief?

When the company isn’t profitable and isn’t able to raise more, founders broadly have three choices: to sell, to go into zombie mode (reduce burn to zero, meaning no productivity or revenue) or to shut down. The route they take affects whether you can claim loss relief.

Option 1: the company is sold

Is loss relief available?

• Yes, you can claim loss relief if you receive less for your shares than you paid for them.
• BUT… note that if the company is sold within 3 years of your investment, you will lose the original SEIS/EIS tax deduction but will be able to claim loss relief when selling shares at a loss, as explained in this example on the HMRC site.

Conditions:

• As an SEIS/EIS investor, you’ll qualify for loss relief if you sell your shares at a lower price than you paid.
• The loss relief depends on what Income Tax relief you received when you bought the shares and whether HMRC has withdrawn any of your Income Tax relief.
• There’s no minimum or maximum time that you must have held your shares.

Option 2: the company goes into zombie mode

Is loss relief available?

• No, because you’re still holding on to your shares, nothing has been sold.
• BUT… you may be able to make a negligible value claim and be able to claim a loss, even if you’re still holding your shares.

Option 3: the company shuts down (voluntary liquidation)

Is loss relief available?

• Yes

Conditions:

• As an SEIS/EIS investor, you might be eligible for loss relief if the company is voluntarily wound up for genuine commercial reasons.
• The loss relief depends on what Income Tax relief you received when you bought the shares and whether HMRC has withdrawn any of your Income Tax relief.
• There’s no minimum or maximum time that you must have held your shares.

Take a look at this video to hear from SeedLegals co-founder and CEO, Anthony Rose, how each of these three strategies affects your loss relief as an SEIS/EIS investor and when you’ll be able to claim.

How do EIS funds work?

If you don’t want to manage the investment process yourself, you can still benefit from EIS tax relief by investing in an EIS fund.

EIS funds pool money from investors to spread across a portfolio of EIS-eligible companies. The fund is responsible for due diligence and making sure that the companies in the portfolio qualify for EIS.

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