How to claim EIS Loss Relief

EIS Loss relief is one of several favourable tax treatments available to Enterprise Investment Scheme (EIS) investors, reducing the risk of capital losses when investing in early-stage businesses and funds. But how does it work and how can EIS loss relief be claimed?

It works by reducing the investor’s tax liabilities by some of the loss suffered, thus mitigating the total loss exposure. Investors can claim tax relief or a rebate for taxes already paid to cushion financial losses made when an EIS company fails, or shares don’t perform as expected.

Claiming EIS loss relief is generally straightforward and usually means simply filing the details of the loss relief allowable through the self-assessment tax submission process. However, we advise speaking with your accountant on personal tax matters. In this article, we’ll explain in more detail how a claim would generally be submitted.


What is EIS Loss Relief, and Why Is it Beneficial?

As one of the tax advantages of EIS investment, loss relief means that if you make a loss, you can offset that against other tax obligations, including income tax and capital gains tax charges. You are eligible for loss relief if the realised – or extracted – value of your investment has dropped beneath the effective cost.

Effective costs are calculated by looking at the amount you originally invested, less the income tax claimed, which is available against up to 30% of the initial invested value. For instance, if you invested £200,000 in EIS shares and claimed the full 30% income tax relief, your effective cost would be £140,000.

The caveat is that you can only apply EIS loss relief against other existing tax obligations. An investor with total tax liabilities of £100,000 would only be able to offset up to that value, at least within the current tax period.

Loss relief is included in the package of EIS tax treatments because younger companies deliver variable returns, and while some can provide excellent profitability, others may not issue returns at all, or shares may fall in value.

Investors can claim loss relief on any EIS shares that have lost value, irrespective of whether they have a wider EIS portfolio that has, cumulatively, generated a return.

You can read more about EIS loss relief here.

Applying EIS Loss Relief Against Income Tax and Capital Gains Tax Liabilities

If an investor sells EIS shares for less than they paid or below the effective cost (as we’ve explained above), the allowable loss is calculated as the difference. In our above example, shares with an effective cost of £140,000 sold for £100,000 would have a net loss of £40,000 – calculated against the effective cost, not the originally invested value of £200,000.

The loss relief available depends on the investor’s marginal tax rate if they offset the loss against an income tax liability. For an additional-rate taxpayer in the 45% tax bracket, that would mean loss relief of 45% x £40,000, so £18,000. 

Offsetting loss relief against a capital gains tax burden works differently, although investors can apply loss relief in the current or the next tax period. In this scenario, loss relief is still based on the allowable loss but multiplied by the relevant capital gains tax rate.

Investors with a capital gains tax charge based on 20% can, therefore, use this same percentage to determine their loss relief. Our loss of £40,000 would provide £8,000 in capital gains loss relief.

How to Submit a Claim for EIS Loss Relief

For most investors, loss relief is claimed through their self-assessment tax return. They document the loss details on form SA108 within the return documentation and reduce their income or capital gains tax charge by the relevant value.

It is possible to claim loss relief against income tax retrospectively. Where the tax bill has already been settled, HMRC will normally issue a rebate for the allowable relief.

Investors who have already utilised capital gains deferrals through the EIS will need to be conscious that the deferred gain, reinvested into EIS shares, will become taxable when the shares are transferred, disposed of, or the company enters into liquidation.

If the taxable gain exceeds the annual allowance, investors can use their loss relief to reduce the capital gains tax charge or pay the amount and apply the loss relief to their income tax obligations.

The Impact of EIS Loss Relief 

Although loss relief is welcome and reduces the risk of EIS investment, any investor should note that they can still make a net loss. As we’ve seen, relief is calculated based on the allowable loss multiplied by the applicable tax rate rather than by deducting the full net value of the loss against other tax charges.

However, loss relief alongside other tax treatments reduces the financial impact if an EIS-qualifying company fails. Sticking with our example figures:

Without loss relief, the £200,000 investment, with a net effective cost of £140,000 after 30% income tax relief, would result in a £40,000 capital loss if shares were devalued and sold for £100,000.

Applying the loss against an income tax liability would reduce the net loss from £40,000 to £22,000, or using loss relief to minimise capital gains tax exposure would reduce the loss to £32,000.

All of the tax reliefs associated with EIS investments rely on the company and investor remaining eligible. If a business fails or shares fall in value, but the organisation no longer qualifies for the EIS due to changes in its trading volumes, asset base or workforce, the investor cannot claim loss relief.

Likewise, if an investor leaves EIS shares to a beneficiary and the investment value has fallen, the recipient cannot claim loss relief, even if this relief would have been allowable when the original owner held the shares.

The tax office takes the view that when shares are bequeathed to an heir in a will, they are acquired at the time based on their current value, so any drop in share value does not mean the new owner is eligible for loss relief.

However, if the EIS shares lose further value after the date of the inheritance, the recipient may be able to apply loss relief against their tax obligations.

Want to find out more about how EIS works? Read our related articles below:

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