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UNDER EIS Tax Relief
EIS tax relief
UK investors who pay tax have access to several reliefs when investing in companies that qualify for EIS.
1) Income tax relief
Investors may claim up to 30% income tax relief on their EIS investments, which helps offset some of the risks associated with investing in small businesses. The maximum amount an investor can claim in a single tax year is based on an investment limit of £1 million, providing up to £300,000 in income tax relief.
This relief applies to the tax year in which the investment is made into the company. However, for unapproved EIS funds, investors can opt to backdate the investment to the previous tax year, allowing a potential investment of up to £2 million within one tax year (£1 million for the current tax year and £1 million carried back to the previous year).
Note that investors must hold their shares for at least three years, and the company must retain its EIS-qualifying status throughout that period. Otherwise, the relief will need to be repaid to HMRC. Income tax relief can only reduce the tax bill to nil; any excess cannot be refunded.
2) Tax-free growth
When EIS shares are sold, any increase in value is entirely free from capital gains tax. This is particularly beneficial as early-stage companies can often experience significant growth.
To benefit from this relief, investors must have already claimed income tax relief, and the company must remain EIS-qualifying for at least three years. Additionally, the shares must have been held for a minimum of three years.
Knowledge Intensive Companies (KICs)
KICs allow greater flexibility, increasing the investment limit to £2 million per tax year, provided at least £1 million is invested in KICs. Investors may also backdate their investment, potentially allowing up to £4 million over two tax years.
3) Capital gains deferral
Investors can defer capital gains by reinvesting them into EIS shares. This deferral applies for the lifetime of the investment, with no upper limit on the gains that can be deferred. However, it’s the gain, not the sale proceeds, that must be reinvested.
For example, if an asset is sold for £50,000, having originally cost £10,000, the gain of £40,000 would need to be reinvested to qualify for deferral. This reinvestment can be made within a window of 12 months before or up to three years after the original gain.
The deferred gain will remain on hold until one of the following events occurs:
- The EIS shares are sold.
- The company loses its EIS-qualifying status within three years.
- The investor ceases to be a UK resident within three years of the investment.
When the deferred gain comes back into charge, it will be subject to capital gains tax at the current rate. The gain can be deferred again if reinvested in another EIS-qualifying investment. If the investor passes away while still holding the EIS shares, the gain is cancelled.
4) EIS and Inheritance tax relief
EIS shares qualify for business relief, which allows them to be passed to beneficiaries free from inheritance tax, provided the shares have been held for at least two years at the time of death.
5) Loss relief
Given the nature of EIS investments in early-stage companies, the risk of loss is higher compared to other investments. However, EIS loss relief can reduce the financial impact if an individual company’s shares decrease in value. Even if an investor’s entire portfolio delivers an overall positive return, they can still claim loss relief on individual investments that performed poorly.
Important to note
EIS tax reliefs help offset some of the risks involved in investing in early-stage companies. However, the availability of tax reliefs depends on qualifying conditions and the investor’s personal circumstances.