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If you need to know how to claim EIS income tax relief and enjoy what is a generous scheme, then this article will help.
What is the Enterprise Investment Scheme (EIS)?
It is a UK government scheme that was launched in 1994 to help high risk, young businesses raise the finance they need to expand and develop.
In return, the EIS offers investors substantial tax reliefs for investing in riskier ventures.
It is now a well-established part of the investment scheme landscape, and for many investors, it could be a sound investment for their portfolio.
Investors can claim their EIS tax relief:
- For up to £1 million of investment in an EIS qualifying company
- Up to £2 million of investments in a knowledge-intensive firm.
Investors can use the scheme’s ‘carry back’ feature to apply the relief to the preceding tax year on eligible investments.
What EIS tax reliefs are available?
For investors, there is a range of EIS tax reliefs available, and they include:
- Up to 30% of income tax relief on the amount invested
- There is zero Capital Gains Tax (CGT) on the disposal of shares
- There's the option to claim loss relief if the shares lose value when sold against the CGT or income tax bill
- Investors can defer the CGT payable on the disposal of any asset
- Business property relief will be available under Inheritance Tax (IHT) rules after two years.
Another attractive benefit for EIS tax reliefs includes giving investors the ability to defer any capital gains they have that are greater than the annual exemption by investing in EIS.
CGT deferral relief will freeze the gain as well as the tax liability is deferred until the EIS shares are disposed of.
However, investors need to be aware that a further EIS investment can then be made to defer their tax liability again.
How to claim your EIS tax relief
The process to claim your EIS tax relief is straightforward.
You need to provide HMRC with the relevant information which includes the information that will be on your EIS2 Certificate:
- The names of the EIS companies that you invested in
- The amount per company for which you are claiming relief
- The share issues date (not always the same date of the investment)
- The HMRC office that authorised the EIS2 certificate issue and the reference - which is on the certificate; and
- Send a completed EIS3 claim form to HMRC to compliment your filed income tax return.
It's a straightforward process to collate the relevant information in an Excel sheet so you can then add up the total amount invested which will be the additional figure necessary for entering into your tax return. Each EIS investment will need to be individually entered into your tax return pages, however.
Individual companies will issue EIS2 certificates ad EIS3 claim forms, but these can take up to four months to arrive from the date shares were issued. Currently, however, HMRC is replying in a matter of just a few days or weeks.
How to qualify for EIS income tax relief
Under the EIS rules for investors, to qualify for income tax relief, you cannot be connected to an investee company. This means:
- You cannot be employed by the investee company, except a director employee under certain conditions
- You cannot be a director or partner of the investee company, except under certain conditions
- You cannot have a significant financial interest in that firm.
These conditions apply for two years prior to any share issue and will last until three years after any investment has been made.
The only exception to the EIS rules is for those investors who are unpaid directors of the investee company because they are still able to claim income tax relief.
When do you claim EIS tax relief?
An investor will normally claim their EIS tax relief when they complete their tax return. Most of the information you need will be on the EIS2 certificate.
However, when investing in an EIS fund, you will receive usually one EIS2 certificate for each of the fund’s underlying companies.
If you claim tax relief using a paper tax return, you need to complete the additional information sheet, it's also known as SA101. This must be included with your return.
You do need to submit the EIS3 claim form for those investments you are claiming the relief for but you keep the EIS2 certificate. HMRC might require that you produce them so you will need to keep the certificates in a safe place.
If you are using the online self-assessment form, you simply answer ‘Yes’ to the question in Section 3 about, ‘Do you want to claim other tax reliefs and deductions?’.
There is another route to claiming your EIS tax relief and that is to complete the claim form EIS3 with the EIS2 certificate.
You then send this completed form to the HMRC tax office.
EIS tax relief if the company fails
Should the EIS company fail, then the investment will become worthless but there is further tax relief to minimise an investor's loss.
For example, if the investor spent £10,000, they will have reclaimed 30% of the investment as income tax relief.
The balance of £7,000 means they can claim tax relief at their income tax rate.
For an additional rate taxpayer, they can claim 45% of the £7,000 which equates to £3,150.
This tax relief structure means that should an investor put £10,000 into an EIS company that then fails, their actual loss from the original investment is £3,850.
Other considerations when claiming EIS tax relief
Investors need to be aware that EIS shares will have to be held for at least three years so they can benefit from income tax relief. Loss relief is available still even if the business fails within those three years, however.
As such, these investments should be seen as a long-term undertaking.
If you sell your EIS shares before holding them for three years, you will need to tell HMRC and then re-pay any income tax relief that you may have claimed.
The government has a useful help sheet that offers more help including the EIS3 Enterprise Investment Scheme certificate and how to claim income tax relief.
Also, claiming tax relief can be a complicated issue and it's important that you seek expert and independent tax advice – and this article should not be taken as financial advice.