EIS Tax Relief Explained
Updated: Nov 10, 2021
All you need to know about the Enterprise Investment Scheme. (Featuring an analysis of UK investor trends, investment case studies and an EIS cheat sheet)
What is EIS?
The Enterprise Investment Scheme (EIS) is a UK government scheme that helps younger, higher-risk businesses raise finance by offering generous tax reliefs to investors. The scheme has been around since 1994, so is a well-established part of the UK tax landscape for investors.
Investors can claim 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 relief on eligible investments to the preceding tax year.
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.
EIS tax reliefs.
The table below outlines the primary tax reliefs available to investors through the EIS scheme. Note, if you pay tax solely through PAYE, you will need to register and file a self-assessment tax return in order to claim tax reliefs. Information on how to do this can by found on the HMRC website.
It may be possible to 'carry back' all or part of your investment to the preceding tax year as long as the limit for relief is not exceeded for that year. (The limit for the Enterprise Investment Scheme is £1m per tax year, rising to £2m provided £1m of this is invested in knowledge-intensive companies.)
If you have capital gains greater than the annual exemption, these can be deferred by making an Enterprise Investment Scheme investment. Capital Gains Tax deferral relief freezes the gain, and the tax liability is deferred until the 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 shares are issued can be deferred and there is no limit on the amount that can be invested.
While the 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.
EIS tax relief examples.
Scenario: A 45% taxpayer invests £10,000:
By comparison, an individual investing £10,000 in a non-EIS company who exits with a 2x return would see a profit, after CGT at the current 20% rate, of just £8,000. Clearly this is a simplification, and is is important to read and understand the further information regarding the Enterprise Investment Scheme tax reliefs set out below.
When and how to claim your EIS tax relief.
To claim Enterprise Investment Scheme tax relief, you'll need to provide HMRC with 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).
The above information can be found on the EIS3 certificates that the company, or fund will supply you post investment. These certificates are typically issued three to four months after the close of the companies funding round as they need to be sent and processed by HMRC based off of information the company supplies to them.
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.
Who can invest in EIS?
In order to qualify for EIS 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 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
· HMRC policy paper on EIS and knowledge-intensive companies
· UK Business Angels Association guide to EIS