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Investor Hub Published:  Jun 30, 2023 7 min read
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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).

In this post, we explain the types of tax relief investors can access under EIS, including Income Tax relief, Capital Gains Tax exemptions, and go into detail on how it works.

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Term Sheet

How does EIS tax relief work?

EIS is one of the UK government’s venture capital schemes that incentivise private independent investment into smaller companies.

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.

Through different forms of tax relief, EIS rewards investors who take a risk on EIS on young, medium-sized companies.

EIS investor benefits

EIS and Income Tax relief

Under EIS, you get 30% back 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

You can invest up to £1,000,000 per year across EIS businesses. That limit rises to £2,000,000 per year if at least £1,000,000 of that is invested in knowledge intensive companies (KICs).

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.

There are restrictions on when you can sell your EIS shares. To qualify for EIS tax relief, you have to hold the shares for 3 years before you ‘dispose of’ (ie, sell) them.

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.

The amount you can claim as loss relief is your at-risk investment (the amount of money you lost minus what you’ve already received in Income Tax relief, any fees attached to the investment) multiplied by your Income Tax rate (20%, 40% or 45%)

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

Eis Tax Relief example, what happens when your shares grow in value
Eis Tax Relief Example, what happens if your shares lose value
Jamie Williams Cadre Advisory

As the calculations show, there is significant benefit to an investor when a gain is made on an EIS investment. The scheme also minimises risk – your total exposure as an additional rate taxpayer is just 38.5% on an EIS investment.

Jamie Williams

Tax Director,

Cadre Advisory

Important: For personalised guidance tailored to your specific circumstances, make sure to consult a qualified tax professional.

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.

Jamie Williams Cadre Advisory

The timing of your investment is key. Funds have to be invested before the shares are issued or on the same day. If funds aren’t received by the date the shares are issued, this is a disqualifying event for the scheme and you’ll lose the relief.

Funds can be invested before the share issue, but the gap should be minimal (unless you’re investing via an advanced subscription agreement). If the gap is too long, you risk the funds being deemed a loan which is another disqualifying event, meaning you’ll lose the relief.

Jamie Williams

Tax Director,

Cadre Advisory

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.

Knowledge Intensive Companies (KICs) are treated differently under EIS
Knowledge Intensive Companies (KICs) are companies that are carrying out research, development or innovation at the time that they are issuing shares. They have a special status under EIS, and investors who support them get more flexibility under the scheme.

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 counts as ‘value’?
An investor is considered to have received value from the company if:
1. the company repays, redeems or repurchases any of its share capital belonging to the investor
2. the company repays a debt owed to the investor
3. the company provides a benefit or facility to the investor

If you’re not sure about whether you have received ‘value’ from the company, read HMRC's guidelines on value

What companies can you invest in under EIS?

EIS rewards investors for supporting medium-sized startups.

To meet EIS status, 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.

Companies can get pre-approved for EIS
If you know that you only want to invest in EIS-eligible startups, look out for companies that have EIS Advance Assurance.

It’s not a guarantee that the company is EIS-compliant, but it’s extra security that (as long as nothing changes) you’re likely to get the EIS tax benefits. That makes it an important part of your due diligence.

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?

SeedLegals speeds up EIS
We work with investee companies to sort their EIS Advance Assurance and EIS Compliance. We manage more EIS AA applications than any other provider, and that expertise is reflected in our 98% success rate (the industry average is only 63%).

 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 the 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.

Investors, claim tax relief through your annual self assessment tax return

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).

Remember that you have five years to claim EIS tax relief, and that there’s some flexibility to carry back tax relief to the previous year.

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.

Jonny Seaman Profile

EIS funds are professionally managed, so tend to have strong deal flow and processes in place to pick the best startups. Naturally, there are usually fees involved, so it’s important to consider whether paying a cut of profits is worth the increased diversification and hands-off nature of investing in a fund.

Jonny Seaman

Investor Partnerships Manager,

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