Income Tax Relief And The EIS: A Comprehensive Guide For Investors

One of the UK’s most generous tools for investing in early-stage companies, the Enterprise Investment Scheme (EIS), is an opportunity to claim back tax breaks and other benefits. Introduced in 1994, it helps high-risk, young businesses raise the finance they need to expand and develop. In return, investors get upto 30% EIS tax relief on the amount invested.

EIS is now a renowned part of the investment scheme landscape, and for investors, it is the key to investing in high-growth startups while minimising risks and maximising returns.

However, to qualify for EIS relief, there are several rules and conditions that an investor must comply with. In this guide, we will take you through the details about EIS and how to claim tax relief.

Contents

The Available EIS Tax Reliefs

EIS is a well-established seed funding scheme in the UK to help early-stage small businesses (private or quoted on AIM) raise funds to support growth. Investors can either invest via an EIS fund or directly into a single company.

Since the investments are subject to high risks, there are significant EIS income tax reliefs available for investors. These include:

UP TO 30% INCOME TAX RELIEF on the invested amount.
The ALLOWANCE FOR EIS IS a £1 MILLION investment in a qualifying company. The allowance is increased to £2 MILLION if invested in a knowledge-intensive firm.
ZERO CAPITAL GAINS TAX (CGT) on the disposal of shares.
LOSS RELIEF: Investors can claim loss relief if the value of shares decreases when sold against the CGT or income tax bill.
Investors can DEFER CAPITAL GAINS by investing the gain into an EIS-qualify company.
CARRY BACK: Investors can use the “carry back” feature to offset tax relief against the previous year’s tax bill.
INHERITANCE TAX: Investors can pass on an EIS investment under Inheritance Tax (IHT) rules after two years.

What Do You Need To Claim EIS Tax Reliefs?

After you invest in an EIS-qualified company, you receive a share certificate and an EIS3 certificate. Your share certificate confirms your investment in the company and that you’re a shareholder.

EIS3 certificate, on the other hand, contains information that you need to claim tax relief. It includes:

The name of the company you have invested in
The amount you have invested in the company
The date on which the shares were issued
The name and reference of the relevant HMRC office
The Unique Investment Reference (UIR) number

How To Claim Your EIS Tax Reliefs?

The process to claim EIS investment tax relief is straightforward.

You need to present relevant information, i.e., the information included on your EIS2 certificate. Collate the information in an Excel spreadsheet and then add up the total amount invested in the company. Make sure to enter each EIS investment into your tax return pages individually.

Note: Individual companies issue EIS2 certificates and EIS3 claim forms, but these can take up to four months to arrive from the dates shared were issued. At present, HMRC replies in just a few days or weeks, however.

Alternative Method

If you’re employed under PAYE and don’t complete your tax return, you can opt for an alternative method of claiming EIS income tax relief. You’ll need to complete PAGES 3 AND 4 of your EIS3 certificate and send them to the HMRC tax office.

Takeaway

As an investor, you can benefit from a variety of tax breaks when investing in EIS-qualifying companies. But do remember that the benefits you receive may depend on an individual’s circumstances and that tax rules can change. Also, to qualify for EIS tax relief, make sure the company maintains its EIS status.