EIS Tax Relief – A Detailed Guide for the UK
Investing in small businesses and startups can be a great way to build long-term profits, but the higher risk level can be daunting to some investors. The EIS, or Enterprise Investment Scheme, helps make this process more appealing by offering a variety of tax incentives and reliefs on higher-risk investments. These range from tax reliefs that you can claim against your income tax bill to tax-free capital gains from your EIS investment profits. Discover the benefits of EIS tax reliefs and how you can claim them.
- EIS, or Enterprise Investment Scheme, offers tax relief to incentivise investing in startups and small businesses.
- EIS tax reliefs include income tax relief, loss relief, CGT disposal relief, and CGT reinvestment relief.
- In order to qualify, you must invest in an EIS-qualified company and hold shares for a minimum of 3 years.
- You can claim these reliefs on your income taxes to reduce your taxable burden.
- What is EIS Tax Relief?
- Benefits of EIS Tax Relief
- EIS Tax Relief Example
- How to Claim EIS Tax Relief
- EIS and SEIS Tax Reliefs Comparison
- How is EIS Tax Relief Calculated
- FreshBooks Makes Tax Preparation Simple
- Frequently Asked Questions
What is EIS Tax Relief?
EIS, or the Enterprise Investment Scheme, is a government program designed to encourage investors to invest in early-stage companies and other potentially risky investments. EIS tax reliefs are a collection of tax reliefs that can incentivise this type of investment by minimising risk and maximising profit. HMRC EIS tax reliefs include income tax relief, tax-free growth, capital gains deferral relief, inheritance tax relief, and loss relief on EIS-qualifying investments.
Benefits of EIS Tax Relief
You might be wondering how EIS tax relief works and how it can benefit you. The following EIS tax benefits and reliefs can reduce your taxable burden and grow your profits.
Income Tax Relief
If you hold investments in an EIS-qualifying company, you can claim up to 30% income tax relief from these investments. Within a given tax year, the maximum amount of income tax relief you can receive from the same EIS-qualifying investment is £300,000 on an investment of £1,000,000. The exception is that this can be increased to £2,000,000 if the excess over £1,000,000 is invested in knowledge-intensive companies.
In order to qualify for EIS income tax relief, the company you invest in must be EIS-qualifying for at least 3 years. You’ll also have to keep your investment for a minimum of 3 years to avoid paying back the relief.
Investments in smaller companies and early-stage businesses can often be higher risk than more established companies, so the EIS investment tax relief helps offset any potential risk. If you sell shares in an EIS company at a loss, you can set this loss amount against your income taxes. This can be applied to the selling year or the previous tax year. Even if you hold multiple EIS investments and have had positive overall returns, you can still claim the loss from an individual investment.
CGT Disposal Relief
While most investments are taxed on capital gain, the EIS offers capital gains tax disposal relief to incentivise EIS investments. So long as you hold your EIS investment for a minimum of 3 years, you don’t have to pay capital gains tax on profits from that sale.
CGT Reinvestment Relief
If you’ve made a significant capital gain from the sale of an asset, reinvesting that gain into an EIS-qualifying company allows you to defer the capital gains tax. There’s no maximum amount to this, so you’re free to invest and defer as much as you’d like. In order to qualify for EIS capital gains tax relief, you must reinvest no later than 3 years after the gain. You’re only required to invest the gain, not the full proceeds from the asset sale.
EIS Tax Relief Example
Example 1: The company is successful, and after 3 years, you sell your shares for a profit:
- Initial investment: £20,000
- You can claim 30% income tax relief, or £6,000
- You sell your shares for £30,000
- Total gain = £10,000 profits + £6,000 income tax relief = £16,000 total gain
Example 2: You hold your shares for 3 years, and the company value doesn’t change:
- Initial investment: £20,000
- You can claim 30% income tax relief, or £6,000
- Total gain = £6,000 income tax relief
How to Claim EIS Tax Relief
The exact method for claiming EIS tax relief depends on which relief you’re claiming, but in general, the process is as follows:
- Invest in a qualified EIS company, purchasing ordinary shares in cash
- After 4 months of trading, the company will send you an EIS3 certificate
- Submit this certificate with your taxes to claim the EIS income tax relief
For the capital gains tax, you’re not required to take any action aside from holding your shares for a minimum of 3 years. Loss relief is declared on your personal income taxes, while capital gains taxes are also declared on your income taxes and require your EIS3 certificate.
Looking for even more information on simplifying your personal and business taxes? Discover how FreshBooks takes the pain out of tax preparation for helpful filing tips.
EIS and SEIS Tax Reliefs Comparison
The government offers two tax relief schemes to motivate small business investment. Compare EIS and SEIS tax relief to see which is the best fit for your portfolio.
|Scheme||Maximum Investment||Income Tax Relief||CGT Relief/Deferral||Tax-Free Dividends||Tax-Free Growth||IHT Relief||Loss Relief|
|EIS||£2,000,000*||30%||Deferral||No||Yes||After 2 Years||Yes|
|SEIS||£200,000||50%||50% Relief||No||Yes||After 2 Years||Yes|
- *The usual limit is £1m, but this rises to £2m if the amount above £1m is invested in knowledge-intensive companies that carry out research, development, or innovation.
- This table offers an introductory guide to EIS and SEIS—examining the full rules and conditions can help you make an informed choice on your next investment. These limits and rules can also change from year to year, so it’s important to check in with the HMRC before investing.
Discover even more about the difference between EIS and SEIS with our in-depth SEIS vs EIS comparison of the two investment relief schemes.
How is EIS Tax Relief Calculated
If you’re claiming EIS income tax relief, simply calculate 30% of your EIS investment and hold that against your income. For example, if you invested £10,000, you can claim £3,000 as income tax relief.
Loss relief works similarly—begin by calculating your loss and then multiplying that by the marginal rate of income tax. For example, if you bought shares for £20,000 and sold them for £10,000, your loss is £10,000. If the marginal rate of income tax is 45%, multiply £10,000 by 0.45 to get £4,500. This is the amount of loss you can claim against your income when you file.
FreshBooks Makes Tax Preparation Simple
The Enterprise Investment Scheme offers a variety of tax reliefs to encourage investors to explore higher-risk portfolios with startups and small businesses. These reliefs include income, loss, and capital gains reliefs. EIS tax reliefs can help reduce your taxable income and maximise your profits by avoiding and deferring capital gains tax.
FAQs About EIS Tax Relief
Learn more about EIS tax relief eligibility and how to claim EIS relief with answers to frequently asked questions on the Enterprise Investment Scheme.
Who is eligible for EIS income tax relief?
In order to claim EIS shares for income tax relief, you must be a UK resident or otherwise hold UK income taxes that you can claim relief against. The company you invest in must be EIS-qualified, and you must hold shares for at least 3 years to receive tax relief.
How does EIS tax relief work?
EIS scheme tax relief allows you to claim certain tax breaks when you hold investments in an EIS-qualified company. This can range from income tax relief and loss relief that you can claim on your income taxes to capital gains and deferral relief when you reinvest profits into EIS companies.
How do I claim EIS loss relief on my tax return?
You can claim your EIS loss relief on your personal tax returns, either when you sell your shares or if they hit a zero value. If you’re claiming income tax loss relief, you should claim it in the year following the loss or up to 4 years after for capital gains relief.
How do I carry back EIS relief on my tax return?
If you’ve lost money on your EIS investment, you can choose to either claim tax relief for the loss on your current tax year or carry it back to the previous year. If this is the case, the HMRC may issue you a refund for income relief from the previous year.
When can I claim EIS tax relief?
EIS investments must be held for 3 years in order to qualify for relief, but you can claim some relief sooner. EIS income tax relief is available in the first year that shares are issued to you, so you can claim in the current year.
About the author
Levon Kokhlikyan is a Finance Manager and accountant with 18 years of experience in managerial accounting and consolidations. He has a proven track record of success in cost accounting, analyzing financial data, and implementing effective processes. Levon holds an ACCA accreditation and a bachelor’s degree in social science from Yerevan State University. Catch up with him on LinkedIn: https://www.linkedin.com/in/levon-kokhlikyan-34281398/