What are the EIS Tax Reliefs

The most generous tax reliefs available across all tax-efficient investments.

One of the most attractive benefits of an EIS is that it provides access to multiple tax reliefs that an individual investor may access. Subject to the specific circumstances of the investor, they may access multiple different tax reliefs in one single investment.

To find out how these work in practice, select here to explore different case studies.

Select the + drop downs for further explanation:

Investors can claim up to 30% income tax relief on EIS investments up to £1 million per tax year, provided the shares are held for at least three years. Investors can claim up to £300,000 in annual income tax relief. Relief can be claimed against any income, including dividends and bonuses.

The Government allows investors to ‘carry back’ income tax relief, claiming in both the current and previous tax year to when the capital is deployed (which is different from when the investment is made).

After 6 April 2018, the maximum investment that investors can claim relief on in a single tax year has been increased to £2 million if the excess over £1 million is invested in ‘Knowledge-Intensive companies’.

As a simplified example, by investing £100,000 into an EIS, the investor can claim up to £30,000 back in income tax relief. The same investor can carry a portion of the £30,000 income tax relief into the previous tax year should they not have paid £30,000 in income tax in the current tax year. The invested amount must be deployed, and certificates allotted to carry back income tax relief must be shared.

FEES

Watch out for fee structures implemented by fund managers. Fees charged to the investor will reduce the amount of money invested into the EIS and, subsequently, the amount of income tax relief you can claim.

DEPLOYMENT TIMESCALES

The money has to have been deployed to claim. This means that only once the amount you invested is passed on to the companies within the EIS can you receive the documentation you need to claim relief from HMRC (the EIS3 Certificate). You will receive an EIS3 certificate from your fund manager on deployment, and you will have one per company within the EIS.

Tip: Ask about deployment timescales, which may take anywhere from 1 to 18 months. The time horizon can impact tax planning as it may take you into a different tax year.

HMRC guidelines say that the money invested into an EIS must be held for at least three years; if not, investors may be asked to repay their income tax relief. So, in what scenarios could the money be exited before the three-year time horizon?

They allow investors to defer capital gains that would otherwise be taxable as long as the investment is made within the twelve months before the EIS investment or within three years after. Investigate a planning angle that may reduce the capital gains tax owed when the EIS shares are sold below.

It’s important to note that the gain is deferred, not the sale proceeds, that should be reinvested.

For example, if an asset were sold for £50,000 and cost £10,000, this would result in a gain of £40,000. This £40,000 would need reinvestment in EIS-qualifying shares to defer the gain.

The gain will be deferred until the earliest of any of the following events:

  • The EIS shares are sold.
  • The company ceases to be EIS-qualifying within three years of investment.
  • An investor ceases to be a UK resident within three years of investment.
  • The investor passes away owning the EIS shares; in this case, the gain is no longer owed.

Please note that when a deferred gain comes back into charge, it will be subject to capital gains tax at the relevant rate. However, a deferred gain that comes back into charge can be deferred again if reinvested into a new EIS-qualifying investment.

Read our Capital Gains Deferral case study

If the value of EIS shares drops to zero or the shares are sold for less than the original amount invested, investors can claim loss relief. This type of relief has been designed to reduce the impact of losses made on individual companies. This is the case even if an investor holds a portfolio of EIS companies with a positive return overall. Loss relief can be claimed against either their income tax or capital gains tax bill.

EIS shares qualify for Business Property Relief (BPR). This means they can qualify for up to 100% inheritance tax relief as long as they’ve been held for at least two years at the time of death, subject to a personal allowance of £2.5m.

When investors sell EIS shares, any growth in value from an investment is 100% tax-free. This is worth noting because small, early-stage companies have the potential to grow significantly.

To qualify for this relief, income tax relief must have already been claimed – and not withdrawn by HMRC. Also, investors must hold the shares for at least three years, and the company must remain EIS-qualifying for at least three years.

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