The Enterprise Investment Scheme (EIS) is a tax relief scheme that allows investors to receive tax breaks from some income tax and capital gains tax (CGT) in return for investing in high-risk early-stage businesses. The scheme was introduced to help stimulate the UK economy by encouraging entrepreneurship. Start-up companies that qualify are able to benefit by attracting investors through offering the incentive of tax relief. Investors, in return, are able to minimise their loss if the company fails but can also profit further if the company is successful by retaining 100% of their gain without the need to pay CGT.
How does EIS tax relief work?
An investor can make a maximum investment of £1 million into a qualifying EIS business per year, or up to £2 million if the qualifying business is considered ‘knowledge intensive’. In return for the cash investment, the investor will receive ordinary shares in that company but must ensure this is no more than 30% of the total share capital. At this point, the investor is able to start receiving tax benefits and is able to receive income tax relief of 30% of the investment made. If £10,000 was invested into an EIS company, the investor would be able to deduct their income tax bill by £3,000. The shares must be kept for a minimum of 3 years before they can be disposed of otherwise any tax relief that has already been received will be clawed back and any future possible tax relief will no longer be available. The outcome of how much the investor will receive and what other tax reliefs they can benefit from will be dependent on how successful the business becomes.
How does EIS tax relief work if the company fails?
In the unfortunate event that the company fails, and the investment becomes worthless, further income tax relief becomes available to the investor to minimise loss. If £10,000 was made as an investment, the investor would be able to claim £3,000 (30% of the investment) as income tax relief at the time. From the remaining £7,000 that has been lost due to poor investment, the investor can claim tax relief at the same rate as their income tax rate. For additional rate taxpayers that means 45% can be reclaimed from £7,000 which is £3,150. The actual loss is therefore only £3,850 from the original £10,000 of investment.
How does EIS tax relief work if the company breaks even?
If the value of the company remains the same, then some tax benefit has still been received by the investor in the form of income tax relief. The investor is able to claim 30% of the amount invested back in income tax relief for the tax year that the investment is made or choose to carry it back to a previous year if they wish. However, if they choose to carry it back, they must ensure that they have not reached the limit of £1,000,000 in EIS shares for that year where they may have already received 30% income tax relief.
How does EIS tax relief work if the company grows in value?
Where a company is successful and grows in value, the investor can receive further tax benefits. Using the example of a £10,000 investment and the company doubles in value, not only would the investor have received 30% (£3,000) as income tax relief, but when they go to sell their shares which would then be worth £20,000, the gain made would be entirely CGT-free. They would therefore have made a total of £13,000 from their initial investment. The investor can also choose to defer the CGT as well as pass on EIS shares inheritance tax-free (explained in more detail under benefits of EIS investments).
What you need to claim EIS relief
When you invest in EIS-approved shares, you will receive an EIS3 certificate for each of the companies you invest in, typically within a few months of the investment. Sometimes this can take longer as the EIS company must have been trading for at least four months and confirm they have spent at least 70% of the funds raised with HMRC before they are able to request and issue this certificate to investors.
If your investment was made through an approved investment fund, the company will issue the EIS3 form to the fund manager instead, who will then issue you with an EIS5 certificate. Both EIS3 and EIS5 certificates contain the same information that you will need for your claim:
- The Unique Investment Reference (UIR) or name of the HMRC office authorising the issue of the certificate and their reference
- The name of the company invested in
- The amount you have subscribed and are claiming tax relief on
- The date on which the shares are issued (which is often different from the date you invested)
How you claim the tax relief will depend on how you submit your tax return, either submitting it digitally or by post.
How do I claim EIS tax relief on my paper tax return?
If you submit your self-assessment tax return by post, claiming the tax relief from an EIS investment is straight forward. You will need to complete the SA101 form for ‘additional information’ and attach it with your main SA100 tax return.
The section you need to complete is box 2, titled ‘subscription for shares under the Enterprise Investment Scheme’ under ‘other tax reliefs’ on page Ai 2 of the form. Write the total amount of all your EIS subscriptions for which you wish to claim tax relief, as outlined on the EIS3/EIS5 certificates.
Under ‘Any other information’ which is box 19 on page TR7 of the SA100 tax return form as shown below you need to include the details on the EIS3 and EIS5 certificates.
It is worth noting that you are not required to include the EIS3/EIS5 certificates with your self-assessment tax return when you claim the tax relief. However, HMRC may ask you to produce them, so you must keep a copy of the certificates for all claims you make.
Once you make a claim, the tax relief will reduce the amount of tax you have to pay. If the tax relief is higher than your annual taxable amount, you will have to forfeit the additional tax relief as it cannot be carried forward into the next year.
How do I claim EIS tax relief through my online self-assessment tax return?
The process is not too dissimilar to the paper tax return. When working through the online form, accessed through the government website, you will need to answer “yes” to the question on ‘other tax reliefs’ in section 3, titled ‘tailor your tax return’.
Once you check the “yes” box, go to section four in the ‘other tax relief and deductions’ (page 2) and enter the total amount of all your EIS subscriptions on which you wish to claim tax relief and provide the same details outlined above.
As with the paper return, you are not required to submit the EIS3/EIS5 certificate with your return but may be required to present them at a later date. The tax relief will then be applied against your total tax liability once you complete the rest of the form.
Other ways to claim EIS tax relief
There is an alternative way of claiming the tax relief by completing the form on pages 3 & 4 of the EIS3/EIS5 certificate. However, this is only done under certain circumstances, outlined below:
- You want to use the ‘carry back’ option on part or all of the cost of shares acquired. This allows you to apply the tax relief to the previous year’s income tax liability rather than the year in which the shares were bought. You may want to choose this option where you would rather receive a tax rebate.
- You pay tax via PAYE and want to receive the tax relief through an adjustment to your tax code instead of through a self-assessment tax return. It is important to note that this option does not necessarily negate the need for you to complete a self-assessment tax return if you are required to do so, however can be a benefit as it means you receive the tax relief throughout the year as opposed to only after you have completed your self-assessment tax return.
- You want to claim the CGT deferral relief as well as income tax relief.
- You don’t normally need to file a self-assessment tax return as all your tax is paid at source through PAYE, and you do not want to register for self-assessment in order to receive the tax relief benefits from EIS.
Investing in EIS shares is only recommended to higher rate and additional rate taxpayers with sufficient tax liability in order to fully benefit from the tax relief. Further information can be found on how to make EIS investments.