EIS is a tax relief scheme created by the UK Government to encourage investment into startups and early-stage businesses.
As an investor, EIS benefits you by offering potentially significant income tax and capital gains reliefs when you make an investment into an EIS eligible startup or business.
As a business, EIS benefits you by making your company a more attractive and less risky investment opportunity to investors. In this article, we outline some benefits and examples of EIS tax relief, but please bear in mind that Seedrs is not authorised to give tax advice, and what applies to you will depend on your individual circumstances, so please be sure to get independent tax advice.
What are the EIS Tax Relief Benefits for Investors?
When you invest into an EIS eligible company, you can receive tax benefits in the following ways:
EIS Income Tax Relief:
You can claim back up to 30% of the value of your investment in the form of income tax relief. Therefore if you make an investment of £10,000 you can save £3,000 in income tax.
EIS Capital Gains Tax Relief:
If you hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from Capital Gains Tax when you come to sell them. Therefore, if you buy your shares for £10,000 and in 3 years they are worth £30,000, you will not have to pay capital gains tax on the £20,000 gain if you decide to sell your shares. Please note that is is an example only, and due to startup equity being a high risk asset class, your investment value can also decrease over time.
You will not have to pay Capital Gains Tax until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for EIS. You will usually have to pay the Capital Gains Tax when you dispose of the EIS shares.
EIS Loss Relief:
If the business performs poorly and you lose money on your investment, you may claim loss relief.
The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 45%, you can claim to 45% of your net loss in income tax relief.
For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly you could claim the 30% income tax relief (£3,000 in this example). You can then claim loss relief on the remaining £7,000 of an amount equal to your income tax bracket – in this scenario 45% or £3,150, meaning you total loss is only £3,850.
Applying tax relief to a previous year (carry-back):
You can treat some or all of the shares as being issued in the preceding tax year, as long as you had not reached the limit for the value of EIS shares purchased (£1,000,000) in that year.
If, for example, you invest £10,000 in an EIS eligible company in the 2018-19 tax year, your income tax relief would be £3000 (30% of £10,000). You can apply to have that £3,000 carried back to the previous tax year (2017-2018) and relieved against your tax in that year, as long as you had not acquired more than £1,000,000 worth of EIS shares in that year.
EIS Inheritance Tax Relief:
You can generally claim Inheritance Tax relief of 100% after two years of holding the EIS shares. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.
If you’re unclear on how this works for you, have a look at some of the examples below or use our EIS tax relief calculator.
What are the EIS Tax Relief Rules for Investors?
To qualify for these tax benefits, investors must abide by the following rules:
You can only invest up to a maximum of £1 million in any number of qualifying companies in each tax year.
You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3 year period, you will be subject to relief clawback.
You can not carry-forward your EIS tax relief.
You must be a UK taxpayer.
You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director)
You must be buying brand new shares that are not already on the market.