EIS tax relief

Authors:

Caroline Joseph, Lucy Hoyle

Read time: 4 minutes

Published date: August 13, 2024

The Enterprise Investment Scheme offers generous tax reliefs to investors as an incentive for backing early-stage companies. Learn more about SEIS tax benefits and the rules startups must follow.

What is EIS tax relief?

EIS tax relief is a benefit available to investors through the UK’s Enterprise Investment Scheme (EIS). By offering generous tax breaks, this government-led scheme aims to incentivise investment in high-risk businesses.

Qualifying companies can raise a total of £12 million (up to £5 million per tax year) through EIS and other venture capital schemes, such as the Seed Enterprise Investment Scheme (SEIS). Meanwhile, EIS investors are able to claim 30% income tax relief on a maximum investment of £1 million per year. They’re also exempt from paying any capital gains tax (CGT) when selling their EIS shares.

Investors can claim tax relief from multiple venture capital schemes in the same year, which covers both EIS and SEIS tax relief.

EIS investor tax benefits

Investing in a startup through EIS allows investors to take advantage of various tax breaks, including:

• Income tax relief
• Capital gains tax exemption
• Capital gains deferral relief
• Loss relief
• Inheritance tax relief

EIS income tax relief

The maximum amount that an individual can invest in EIS-qualifying companies each year is £1 million. However, the annual limit rises to £2 million if at least £1 million is used to fund knowledge intensive companies (KICs).

When it’s time to file a tax return, investors can claim income tax relief on up to 30% of the amount invested.

What is a knowledge-intensive company (KIC)?

A KIC is a business that meets specific criteria set by the UK government, primarily focused on research, development and innovation. KICs typically have a high proportion of skilled workers, invest heavily in intellectual property and attempt to make scientific or technological advances.

Capital gains tax exemption

Investors typically have to pay capital gains tax (CGT) on any profit they make from the sale of company shares. However, investing through EIS removes this specific tax liability; as long as investors hold their EIS shares for at least three years before disposing of them, no CGT will be due.

Capital gains deferral relief

Investors can defer 100% of the CGT from selling non-EIS shares if they reinvest the gains in an EIS-qualifying company. Capital gains deferral relief should not be confused with SEIS reinvestment relief; under EIS, the investor’s tax liability is deferred but not removed entirely, so they’ll need to pay CGT at some point in the future.

Loss relief

In the event that EIS shares are sold at a loss (i.e. for less than the purchase price), investors can claim EIS loss relief on their investment. The amount of relief available depends on their individual income tax rate and the investment at risk (i.e. money lost minus income tax relief already received).

Inheritance tax relief

Anyone inheriting the assets of a deceased investor may be able to claim inheritance tax relief on EIS shares held for at least two years, as part of Business Property Relief (BPR) in the UK.

Eligibility criteria for companies and investors

To qualify for EIS tax relief, there are specific conditions that both companies and investors must meet.

It’s important to be aware of these additional rules to avoid disqualifying events or arrangements:

• New shares issued to EIS investors must be full-risk ordinary shares that are not redeemable and carry no special rights to the company’s assets
• The EIS investment must represent capital at risk (i.e. the ‘risk to capital condition’)
• The scheme cannot be used for the purpose of tax avoidance
• Investors must transfer the EIS funds before the company issues new shares (or on the same day). However, these events should not be too far apart, unless the company raises funding through an Advanced Subscription Agreement (ASA)

EIS Advance Assurance

As part of the early-stage fundraising process, many small companies apply for EIS Advance Assurance from HMRC. Advance Assurance demonstrates that an investment in a specific business is likely to qualify for EIS tax relief.

How to claim EIS tax relief

Investors must claim EIS tax relief after the funding round has closed, and within five years of making the investment (counted from the 31 January following the tax year of the investment). This is the same deadline as self-assessment tax returns in the UK.

Note that income tax relief can’t be carried forward to the following year if an investor doesn’t utilise the full £1 million investment limit. However, it is possible to backdate EIS relief to the previous tax year.

These are three key steps startups need to follow before their investors can claim tax relief:

1. Submit a compliance statement (EIS1)

The EIS company needs to carry out a qualifying business activity for four months (following investment) before filing a compliance statement ( EIS1) with HMRC.

2. Receive an EIS2 letter from HMRC

It usually takes between 15 and 45 working days for HMRC to review the compliance application, although this can vary. After approving the EIS investment status, HMRC will send the company a letter of authorisation ( EIS2), containing a Unique Investment Reference number (UIR) for the share issue.

3. Issue compliance certificates (EIS3)

The company will also receive a blank compliance certificate ( EIS3) from HMRC, which it needs to fill in and send to each investor as evidence of their eligibility for EIS tax relief.

Once this process is complete, investors can submit their EIS3 certificate as part of their annual self-assessment tax return. They must report the total amount of money invested in EIS and other venture capital schemes – including SEIS, venture capital trusts (VCTs) and social investment tax relief (SITR).