What is EIS share loss relief?

As EIS investments are shares in small, early-stage companies that aim for high growth there is a higher risk of losing value compared to other investments.

If the value of EIS shares drops to zero, or if the shares are sold for less than the original amount invested, then loss relief is potentially available.

This allows an investor to offset a loss made on an EIS company against either their capital gains tax bill or income tax bill, depending on which better suits their needs. This acts as added protection when buying riskier shares.

Remember: Loss relief can only reduce the impact of a loss, not eliminate it entirely. An investor can still lose money overall, even if they claim loss relief.

Claiming loss relief against Income Tax
  • The loss can be offset against any income in either the same tax year or the proceeding tax year, or both;
  • The loss is subtracted from the investor’s net income when calculating their income tax liability;
  • Any income tax relief received in relation to the initial investment is subtracted from the capital loss;
  • In practice, as income tax rates are usually higher than CGT rates, offsetting against income tax will generally be more attractive where a client is subject to the higher rates of income tax.

Claiming loss relief against Capital Gains Tax

  • As with conventional capital losses, any losses from the sale of EIS qualifying shares can be offset against any capital gains made in the same tax year, thus reducing any CGT liability.
  • Any remaining losses can be carried forward to a future tax year.
  • Any income tax received in relation to the initial investment is subtracted from capital loss first.The value of this relief can be worked out by multiplying the value of their effective loss by their marginal capital gains tax rate.

Qualifying for EIS share loss relief

Investors may be able to claim tax relief on losses from EIS investments which are sold at a loss or are liquidated. To qualify, the value of an investment when it is sold has to have fallen below the ‘effective cost’ or ‘net cost’. This means the amount invested minus whatever was claimed in income tax relief.

For example, if an investor put £100,000 into EIS shares and claimed upfront income tax relief of £30,000, the effective cost of that investment would be £70,000. If the value of these shares fell to zero, loss relief would be available on the £70,000.

To claim loss relief, investors must have sufficient tax liabilities to offset this against and they must claim the relief within the following time limits.

INCOME TAX: one year from 31 January, after the tax year in which the loss was made.

CAPITAL TAX: four years after the end of the tax year in which the loss was made.

How much loss relief can an investor claim?

When investors dispose of EIS shares at a loss, the Share Loss Relief EIS rules allow them to deduct the amount of the loss either from income tax or capital gains tax. For income tax, the value of the relief will be between 20% and 45% of the loss, depending on the rate at which the investor pays tax. For capital gains tax, the relief will be between 10% and 20%, again depending on the rate at which the investor pays tax.

The example below shows how loss relief is calculated for an EIS-qualifying company where an investment falls to zero.

Example – Partial Loss

If a client invested £50,000 into an individual company and sold their shares for a £25,000 loss, they would be entitled to offset that loss against any other gains that year to minimise their CGT liability.

However, they would not be entitled to offset the entire loss. If they claimed the full £15,000 income tax relief available on the initial purchase, loss relief is limited to £10,000. (£25,000 loss – £15,000 income tax relief = £10,000 available to offset against capital gains or income).

The amount that can be offset is dependent on the applicable CGT or income tax rate.

Since the loss relief is being applied to capital gains charged at 24%, the investor can claim 24% of the loss, a total of £2,400 against their CGT liability in the year of loss or future capital gains.

Client Invests £50,000

Sell shares for £25k loss

Claims £15k Income Tax (£50k x 30%)

Loss Relief available to offset is £10k (£25k loss – £15k Income Tax)

Investor claims £2.4k in Loss Relief (24% of loss)

Example – Total Loss

If a client invests £100,000 into an EIS portfolio, they can reduce their income tax liability by claiming income tax relief to a maximum of £30,000. The effective cost of this investment would then be £70,000. If all investments failed the total loss before loss relief would be £70,000.

In the event of total loss, the amount of loss relief that can be claimed is dependent on the investor’s marginal rate of income tax.

In this case, the investor pays 45% income tax, so can then claim up to 45% of the loss, a total of £31,500 (£70,000 X 45%) against their income tax liability.

This means they have received tax reliefs totalling £61,500 against their £100,000 investments, limiting their exposure to 38.5% of the original investment.

Client Invests £100,000

Reduces tax liability by £30k

Net cash cost of investment £70k

£31.5k claimed in loss relief (70k x 45%)

£61.5k claimed in total tax reliefs (61.5% of original investment)

Please note: Whilst an individual company within a portfolio can fail entirely, it is very unlikely that a well-diversified portfolio of EIS investments will suffer a total loss. Investors may consider various diversification methods to mitigate the risk of total failure, such as; number of companies in their portfolio, utilising different investment managers (including differentiated investment strategies), looking at the underlying technologies, sectors and markets and investing over time.

How to claim EIS share loss relief using a self-assessment form

Luckily, claiming EIS loss relief is a relatively simple process. If investors complete a self-assessment tax return, they can claim EIS losses against either income tax or capital gains tax by completing the relevant part of the SA108 form. Specifically, you need to claim the EIS loss relief in the “Unlisted shares and securities” section.

Loss relief claimed through self-assessment may reduce the amount of tax investors need to pay for the relevant tax year. This can also be claimed retrospectively, so if too much income tax has been paid, HMRC may issue a refund for the excess.

To receive a self-assessment form, you can download one from hmrc.gov.uk or ask HMRC to send you one.

FAQS

If a beneficiary inherits EIS shares that have fallen in value, they cannot claim EIS loss relief that might have been available to the original investor.

HMRC considers the shares as having been acquired by the deceased’s personal representatives at their market value at the time of death, even if the shares have lost most or all of their value since the original investment date. Any decrease in value after the point of inheriting the shares, however, may become a capital loss for the purposes of CGT.

Investors may choose to make a negligible value claim so that they are treated as having disposed of an asset even though they remain the owner.

Investors can do this by informing HMRC that the shares are worth nothing or next to nothing, even if they haven’t been sold / fully liquidated. A negligible value claim will treat the shares as being sold, sometimes called a “deemed disposal”. This allows loss relief to be claimed. If shares are sold in the future, the proceeds will be subject to capital gains tax. If the negligible value claim is made against income in the preceding tax year, the shares need to have been of negligible value at that time.

When EIS shares are sold or a negligible value claim is made, any gains you deferred through your EIS investment, will come back into charge. The deferred gain will be taxable like any other gain in the tax year it comes back into charge. However, loss relief on your EIS shares may be available to offset against the deferred gain.
We do not offer investment or tax advice. Tax treatment depends on personal circumstances. We recommend investors seek professional advice.

An EIS fund manager will often construct a portfolio of EIS-qualifying companies. However, for loss relief purposes each company is considered an individual investment. This means that if any of the individual holdings within the portfolio are sold at an effective loss, loss relief can be claimed even if the overall portfolio performance is positive.

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