How to Claim EIS Income Tax Relief: A Step-by-Step Guide

Gary Green
Gary Green
November 19, 2020

The Enterprise Investment Scheme (EIS) has been designed to increase investment in the early development of high potential growth businesses. The scheme is similar to the Seed Enterprise Investment Scheme (SEIS) although that remains more focused on very early-stage companies.

EIS rules for investors

The EIS was launched back in 1994 and it succeeded the popular Business Expansion Scheme. The EIS encourages investment in smaller, unquoted, trading companies but the limits are significantly larger than for the SEIS.

EIS Income Tax relief

  • The main tax relief for investors comes in the form of Income Tax relief of 30%. The maximum annual amount that an individual can invest per tax year through the EIS is £1 million or £2 million if at least £1 million of that is invested in knowledge-intensive companies. Since 6 April 2020, there are some additional reliefs for investing in EIS approved funds for knowledge-intensive companies.
  • Tax relief can be claimed in the tax year in which the investment is made or can be rolled back to the previous tax year. This means that the annual limits are effectively double as long as you can carry back the excess to the prior tax year. Income Tax relief is limited to the amount which reduces the individual’s Income Tax liability for the year to nil.  You must be a UK taxpayer to qualify or certainly to get the tax relief itself.

EIS Capital Gains Tax relief

  • There is a Capital Gains Tax (CGT) exemption on qualifying gains earned on shares held for a minimum of three years.
  • EIS investments also qualify for 100% CGT deferral relief if you use your qualifying gain from the sale of any asset to make a subsequent amount of investment in a company that qualifies for EIS. 

EIS loss relief

  • Should the investment be unsuccessful, tax relief can generally be claimed for any losses made on the shares bought.  Importantly, what is ordinarily a capital loss can be claimed as an income tax loss. The loss relief available is therefore at the taxpayers’ highest rate of Income Tax.

Inheritance Tax relief

  • Most EIS investments attract 100% IHT relief after two years.

The reliefs can be limited under certain circumstances. As with any investment, it is important that anyone participating in a share issue is aware of the risks involved. This is especially the case when looking at an EIS investment as there can be a significant risk to any capital invested. Investors should be very careful not to invest any money that they are unprepared to lose. The tax breaks effectively offset some of the capital risk. 

The investments can also be very illiquid and need to be held for at least three years before a share sale can be attempted. Some EIS offers include an exit strategy but of course there are no guarantees. 

Regardless, the possibility of high returns has made the EIS a very popular scheme especially for wealthy and savvy taxpayers. It is important to note that the tax reliefs are only available where there is sufficient liability against which to set it. 

Under certain circumstances, small business owners can also benefit from the EIS rules to invest in their own businesses. 

EIS rules for businesses

A company looking to raise finance using both the SEIS and EIS must raise investment first using the SEIS before moving on to the EIS. However, it is possible to apply for both the SEIS and EIS at the same time. This means that once the company passes the £150,000 SEIS limit they will almost immediately be able to move on and raise additional funds of up to £5,000,000 or more using the EIS.

Companies seeking EIS investment are typically more developed than those looking for funding using the SEIS and the investment limits and tax reliefs available reflect this. It is important to remember that it is not just a matter of meeting the eligibility requirements of raising finance but also ensuring that your business can attract investors.

For its investors to be able to claim and keep the tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. If the company ceases to meet one or more of these conditions, investors may have their tax relief withdrawn.

The process for a company to get approved to issue EIS shares involves a fair degree of work. However, the process itself is relatively straightforward once the company meets the necessary qualifying conditions. 

There are a number of conditions that a company must meet in order to obtain formal approval of EIS qualifying status.

The main qualifying criteria for EIS investee businesses are as follows:

  • The company can receive investment under EIS as long as it’s within 7 years of the company’s first commercial sale. If the company has any subsidiaries (including former subsidiaries) or businesses they have acquired, the date of the first commercial sale is the earliest of the group.
  • The maximum amount of funds that a company can raise through investments qualifying for the EIS is £5M in any 12 months with a maximum of £12m over the company’s lifetime. There are higher limits for ‘knowledge-intensive’ companies.
  • There is a maximum limit on the number of employees that the investee company can have when shares are issued. The company must have less than 250 full-time employees or their part-time equivalent.
  • For groups of companies, the limit applies across the group.
  • The company’s gross assets (or of the group assets where the company is a parent company) must be less than £15 million before any shares are issued and not more than £16 million immediately afterwards.

There are also time limits as to when investments can be raised by the company and how and when the money must be spent:

  • One of the most important and often overlooked requirements is that in order to qualify for EIS the company raising the finance must continue trading for at least 3 years from the time the EIS shares were issued. This is a reasonable condition as it encourages the longer-term growth of new companies. If the company goes into liquidation, HMRC will usually not seek to claim back tax incentives from investors. 
  • HMRC is clear that tax relief can be withheld, or withdrawn from investors if the company doesn’t follow the 3-year rule. For example, a start-up exit such as a third-party sale within the 3-year period. HMRC also has the power to withdraw tax relief if the investor sells their shares within the 3 year period.
  • The money raised must be used for a qualifying business activity and the monies must be spent within 2 years of the investment or the date the business started trading (if later).
  • The money must be used to grow or develop the business and cannot be used to buy all or part of another business. 

A company can use the scheme only if it meets the following criteria:

  • has a permanent establishment in the UK;
  • is not trading on a recognised stock exchange at the time of the share issue and does not plan to do so;
  • does not control another company other than qualifying subsidiaries;
  • is not controlled by another company, or does not have more than 50% of its shares owned by another company;
  • does not expect to close after completing a project or series of projects.

It is very important that businesses looking to raise finance using the EIS scheme ensure that they qualify. Otherwise, their investors will be unable to claim the promised tax reliefs. HMRC offers an ‘advance assurance’ service that helps ensure everything is in order before raising finance. It is important to note that the advance assurance service provided by HMRC is a discretionary, non-statutory, service. 

It is no longer possible to request advance assurance on speculative applications. This leaves some start-ups in a Catch-22 situation where it can be hard to attract investment without advance assurance. However, HMRC does not require the company to have formalised offers of investment but rather to have some potential investors on board who are likely to invest if advance assurance is granted. 

If you would like to discuss the EIS or SEIS schemes in more detail, please do not hesitate to get in touch with our experienced team who will be happy to assist you.

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