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What Is EIS Tax Relief? EIS Tax Relief for Investors Explained

The Enterprise Investment Scheme (EIS) is a government-backed initiative that provides you with tax reliefs and other advantages in return for investment in unlisted UK businesses. Companies raising capital investment must apply to HMRC to secure EIS status and can raise up to £5 million per annum, or £12 million as a maximum threshold.

For investors, the benefit of EIS investment is access to generous tax reliefs, including 30% against income tax, exemption from capital gains tax on returns, and loss relief to mitigate the impact of share depreciation or business failure.

Tax Reliefs Available for EIS Investors

The risk associated with an investment in a business that qualifies for the EIS scheme and is not traded on a stock exchange is higher than that associated with a well-established, large organisation with a quantifiable share value.

To offset the exposure accepted by investors, the government incentivises investment in companies, which must have no more than £15 million in gross assets and 250 employees to be eligible.

Once an EIS investment is made, the company will issue you with a certificate, which you must retain to claim the allowable tax reliefs.

Provided you retain your shares for at least three years, you can claim various tax reliefs. Note that if you dispose of the shares within that period, any tax relief already claimed will be withdrawn and repayable, and gains made on share disposal will be subject to capital gains tax.

Income Tax Relief

You can claim income tax relief of up to 30% on an annual investment cap of £1 million. If you choose to invest in EIS-qualifying companies categorised as Knowledge Intensive, the maximum yearly investment value increases to £2 million.

Capital Gains Tax Exemption

As long as you have held your EIS shares for the minimum three-year period, any profit you achieve when selling your shares is exempt from taxation. You must have previously claimed income tax relief to claim a capital gains tax exemption.

Capital Gains Tax Deferral Options 

Taxable gains made on other asset disposals can be reinvested into EIS shares to defer the tax liability for the duration of the investment without an upper limit.

To claim an indefinite deferral, you must reinvest the gain, rather than the full sale proceeds, and do so no more than one year before realising the gain or three years after.

Inheritance Tax Relief

EIS shares are not exposed to inheritance tax, as they qualify for Business Property Relief (BPR). However, shares left to beneficiaries are only exempt from inheritance tax if you have owned them for at least two years beforehand.

Loss Relief

If you invest in an EIS company and make a loss, you can offset that loss against your capital gains or income tax liabilities to mitigate the financial impact. Loss reliefs depend on your tax bracket but are available up to at least 20% of the loss made.

Claiming loss relief does not affect any previous income tax relief claimed.

Claiming EIS Tax Relief

Submitting claims for tax reliefs available against EIS investments is relatively straightforward and does not require additional documentation other than that normally associated with a self-assessment tax return. You will, however, need your EIS share certificate.

When you submit your tax return, you can stipulate the details for all EIS investments held or use the claim form enclosed within your EIS certificate.

HMRC will require the names of the companies you have invested in, the investment values you are claiming relief against, and the issue date of the shares, which may be later than the actual investment date.

Your EIS certification will also include reference details for the HMRC office that approved the certificate, which should be included to verify the tax reliefs you are claiming.

EIS Investment Thresholds for Knowledge-Intensive Companies

While you can claim tax relief on EIS investments up to £1 million per year, the threshold doubles to £2 million for investments in Knowledge Intensive Companies (KICs).

These businesses must be designated as KICs based on the proportion of their operating costs invested in research and development activities, the creation and use of intellectual property, or at least a 20% focus on research and development.

How to Invest in an EIS Company

There are two primary ways to add an EIS investment, or group of investments, to your portfolio. 

Direct investments involve purchasing shares directly through the company, with opportunities often publicised through crowdfunding platforms and other investment forums. The responsibility for due diligence and research into the company’s prospects lies with you.

Fund investments are indirect, which means that a fund manager will select EIS investment opportunities and charge an administrative cost for managing the investment fund.

The most suitable option depends on your preferences, investment expertise and knowledge of the sectors, markets or individual EIS companies you may wish to invest in. Funds tend to be managed based on general objectives and can be focused on particular industries or business categories or aligned with your risk requirements.

Alternatives to EIS Investment

The tax reliefs available through EIS investment are attractive to investors, not least the 30% income tax relief, which could be valuable for higher and additional rate taxpayers.

Alternative investments include the Seed Enterprise Investment Scheme (SEIS), which operates similarly to EIS, although designed for early-stage ventures and new business start-ups. Investing in companies at this stage in their lifecycle is higher risk, so the income tax relief available increases to 50%.

However, you can invest a maximum value of £100,000 per year, as opposed to £1 million a year through the EIS, excluding KICs.

Another option may be to consider Venture Capital Trusts (VCTs), which provide an income tax exemption against dividends issued against ordinary shareholdings. You can also apply for 30% income tax relief against the value of new ordinary shares invested in.

The annual investment threshold for VCTs is capped at £200,000 per tax period, and shares must be retained for at least five years to remain eligible for tax reliefs and other allowances such as disposal relief. 

Disclaimer: The information and opinions within this article are for general information purposes only, are not intended to provide an exhaustive summary of all relevant issues or to constitute investment, tax, legal, or other professional advice. They should not be relied on for, or treated as, a substitute for specific advice relevant to particular circumstances and you should seek your own investment, tax, legal or other advice as appropriate. In not doing so you risk making commitments to products and/or strategies that may not be suitable to your needs. Neither the writer nor EMV Capital Limited accept any responsibility for any errors, omissions or misleading statements in this article or for any loss which may arise from reliance on materials contained on this article.

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Investing in start-ups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution. It should be done only as part of a diversified portfolio. Any investments are targeted exclusively at investors who understand the risks of investing in early-stage businesses and can make their own investment decisions. Any pitches for investment are not offers to the public. Investments made in investee companies via funds managed by Sapphire Capital Partners LLP are not covered by the Financial Services Compensation Scheme (FSCS). For more details, please contact us or refer to their website: https://www.fscs.org.uk


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