EIS Tax Relief Explained – The Complete GuideGuides

EIS Tax Relief Explained – The Complete Guide

Contents

What is EIS tax relief?

EIS is a tax relief scheme created by the UK Government to encourage investment into startups and early-stage businesses.

As an investor, EIS benefits you by offering potentially significant income tax and capital gains reliefs when you make an investment into an EIS eligible startup or business.

As a business, EIS benefits you by making your company a more attractive and less risky investment opportunity to investors.

In this article, we outline some benefits and examples of EIS tax relief, but please bear in mind that Seedrs is not authorised to give tax advice, and what applies to you will depend on your individual circumstances, so please be sure to get independent tax advice.

What are the EIS Tax Relief Benefits for Investors?

When you invest into an EIS eligible company, you can receive tax benefits in the following ways:

  • EIS Income Tax Relief:

    You can claim back up to 30% of the value of your investment in the form of income tax relief. Therefore if you make an investment of £10,000 you can save £3,000 in income tax.

  • EIS Capital Gains Tax Relief:

    • Disposal Relief:

      If you hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from Capital Gains Tax when you come to sell them. Therefore, if you buy your shares for £10,000 and in 3 years they are worth £30,000, you will not have to pay capital gains tax on the £20,000 gain if you decide to sell your shares. Please note that is is an example only, and due to startup equity being a high risk asset class, your investment value can also decrease over time.

    • Deferral Relief:

      You will not have to pay Capital Gains Tax until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for EIS. You will usually have to pay the Capital Gains Tax when you dispose of the EIS shares.

  • EIS Loss Relief:

    • If the business performs poorly and you lose money on your investment, you may claim loss relief.
    • The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 45%, you can claim to 45% of your net loss in income tax relief.
    • For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief.  Firstly you could claim the 30% income tax relief (£3,000 in this example). You can then claim loss relief on the remaining £7,000 of an amount equal to your income tax bracket – in this scenario 45% or £3,150, meaning you total loss is only £3,850.
  • Applying tax relief to a previous year (carry-back):

    You can treat some or all of the shares as being issued in the preceding tax year, as long as you had not reached the limit for the value of EIS shares purchased (£1,000,000) in that year.

    • If, for example, you invest £10,000 in an EIS eligible company in the 2018-19 tax year, your income tax relief would be £3000 (30% of £10,000). You can apply to have that £3,000 carried back to the previous tax year (2017-2018) and relieved against your tax in that year, as long as you had not acquired more than £1,000,000 worth of EIS shares in that year.
  • EIS Inheritance Tax Relief:

    You can generally claim Inheritance Tax relief of 100% after two years of holding the EIS shares. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.

If you’re unclear on how this works for you, have a look at some of the examples below or use our EIS tax relief calculator.

What are the EIS Tax Relief Rules for Investors?

To qualify for these tax benefits, investors must abide by the following rules:

  • You can only invest up to a maximum of £1 million in any number of qualifying companies in each tax year.
  • You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3 year period, you will be subject to relief clawback.
  • You can not carry-forward your EIS tax relief.
  • You must be a UK taxpayer.
  • You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director)
  • You must be buying brand new shares that are not already on the market.

EIS tax relief examples

Looking to get an idea of how much you could actually benefit from EIS? Here are some examples of how EIS tax relief can increase your gains (and decrease your losses) from investments. Please note that eligibility for EIS tax relief depends on individual circumstances.

Example 1: EIS tax relief when your investment increases in value

The business you invest in performs well and triples in value over the course of 3 years, after which you sell your shares:

Your initial investment = £20,000

Income tax relief (30% of your investment) = £6,000

Your investment returns (after 3 years) = £60,000

Capital gains tax (on the sale of shares) = £0

Total returns = £66,000

In this example, you invested £20,000 in an EIS eligible company. You could therefore claim income tax relief on 30% of the amount of your investment, saving you £6,000. When you sell your shares after 3 years, you benefit both from the gain in your investment, as well as having to pay no capital gains tax.

Example 2: EIS tax relief when your investment stays the same value

The business you invest in stays the same value over the course of 3 years, after which you sell your shares:

Your initial investment = £20,000

Income tax relief (30% of your investment) = £6,000

Your investment returns (after 3 years) = £20,000

Capital gains tax (on the sale of shares) = £0

Total returns = £26,000

In this example, although your investment did not increase in value, you still had a £6,000 gain from the income tax relief on your investment.

Example 3: EIS tax relief when your investment decreases in value

The business you invest in performs poorly and winds down, meaning the value of your shares goes to zero.

Your initial investment = £20,000

Income tax relief (30% of your investment) = £6,000

At risk capital = £14,000

Loss relief (if paying income tax at 45%) = £6,300

Total returns = £12,300

In this example, instead of losing the total amount of your £20,000 investment, EIS tax relief means your loss is reduced to £7,700 due to both the income tax relief on your initial investment (£6000) and the loss relief (£6,300).

EIS tax calculator

Use our EIS tax calculator to find out how much you could benefit from making an EIS investment.

Please note that this calculator is for indicative purposes only and tax treatment depends on individual circumstances and is subject to change in the future.

What are the EIS Benefits for Businesses?

The aim of EIS is to help you grow your company by making it easier to raise funds. It does this be offering significant tax relief to investors.

What are the EIS Rules for Businesses?

  • Your company can raise a maximum of £5 million in total in any 12-month period under EIS (if you raise more, only up to £5 million worth of shares with be eligible for EIS).
  • Your company must not have more than £15 million of gross assets.
  • Your company must have fewer than 250 full-time equivalent employees.
  • You can find out more information on whether your company is EIS eligible here.

What’s the difference between EIS and SEIS?

You may have also heard of SEIS tax relief. The main difference between the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) is that SEIS is focused on earlier-stage (seed stage) companies than EIS.

To be eligible for SEIS, a company must be raising no more than £150,000, whereas to be eligible for EIS a company can be raising up to £5 million. For investors, there are also significant differences in tax relief benefits. You can read our guide to SEIS tax relief over here.

How to Claim EIS Tax Relief

We’ve streamlined the tax documentation process for investors on Seedrs. Your tax certificates are digitally stored in your Seedrs account, where you can easily download electronically when submitting your tax return.

Claims for relief in the current tax year by letting HMRC know, who will then either change your PAYE code or make an adjustment on your Self Assessment on account that’s due. You can find out more about this process here.

Claims for losses and for relief for those losses must be made through the tax return and the time limit is the following 31 January, one year after the end of the tax year of the loss. This is 12 months after the deadline for submitting the tax return for that year.

Seedrs has also partnered with SimpleTax to offer Seedrs investors online tax returns at 50% off the regular price, at only £18 using discount code SEEDRS18.

Alternatively, just pass on the relevant details to your tax advisor. Please note that Seedrs is not authorised to give tax advice.

It’s also easy on Seedrs to see which companies qualify for investment under the EIS – just look for the EIS badge on the Investment Opportunities pages on Seedrs.

We hope that you found this overview useful, but tax relief is a complicated subject and what applies to you will depend on your individual circumstances, so please be sure to get independent tax advice.

Finding EIS investment opportunities

Explore EIS eligible companies currently raising funds on Seedrs. Remember that when investing, your capital is at risk.

You can also use our AutoInvest tool to easily build a portfolio of EIS investments in a diverse range of businesses. Learn more here.

You can also find more information on EIS on the HMRC website here

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