EIS Tax Reliefs

To obtain the tax reliefs described below, it is necessary to subscribe for shares in EIS qualifying companies and where appropriate to claim the relief. The summary below is based on current law and gives only a brief outline of the tax reliefs. It does not set out all the rules which must be met by EIS qualifying companies and an investor. The tax reliefs will only be relevant to Investors who are liable to UK income tax and/or wish to defer a capital gain.
EIS income tax relief for investments made after 05 April 2021 can be claimed in the 2020/2021 tax year or can be carried back to the 2019/2020 tax year.
(a) Income Tax Relief – at 30%
Individuals can obtain 30% income tax relief on the amount subscribed for shares in EIS qualifying companies (up to an annual maximum £1 million for the 2018/19 tax year), although relief will be denied for investment into an EIS qualifying company with which the individual is connected. As announced in the Autumn Budget 2017, for shares issued on or after 06 April 2018, the maximum annual investment limit has increased to £2 million provided that any amount over £1 million is invested in one or more “knowledge-intensive” companies. Spouses and civil partners can each separately subscribe up to £1 million.

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The relief is given against the individual’s income tax liability for the tax year in which the shares are issued unless the individual makes a carry back relief claim. Relief is limited to an amount that reduces the investor’s income tax liability for the year to nil.

(b) Carry Back Relief

Carry back relief claims may be made for amounts subscribed for shares in EIS qualifying companies, such that an investment is treated for tax relief purposes as having been made in the tax year before the tax year in which the investment was actually made. In effect, and provided no 2019/20 EIS investments have already been made, this allows an investor to invest up to £2 million in 2020/21 and claim full tax relief.

(c) Capital Gains Tax Deferral

To the extent to which a UK resident investor (including individuals and certain trustees) subscribes for shares, he can claim to defer payment of tax on all or part of a chargeable gain. The gain may have arisen on the disposal of any asset, or a previously deferred gain may have been brought back into charge. Although there is a limit for income tax relief (see (a) above) and for the exemption from capital gains tax upon a disposal (see (d) below), there is no limit on the amount of EIS qualifying investments which can be used to defer a gain. If the investor dies whilst still holding shares, the deferred CGT liability is extinguished entirely. Shares in EIS qualifying companies must be issued within one year before and three years after the date of the disposal which gives rise to the gain or the date upon which a previously deferred gain crystallises. The gain is deferred until there is a chargeable event such as a disposal of shares or a breach of the EIS rules.

For gains made from 6 April 2016 onwards, CGT has been charged at 10% and 20% for individuals (the applicable tax rate depends on the total amount of the individual’s taxable income and will be 20% for an individual liable to higher rates of income tax (28% for certain residential property assets)); 28% for trustees or for personal representatives of someone who has died; and 10% for gains qualifying for Entrepreneurs’ Relief (subject to a maximum lifetime limit of £10 million).

When a previously deferred gain crystallises, the rate of CGT then payable will depend upon the legislation that is in force at that time, and may be greater or lower than the rate that would have applied had Capital Gains Deferral not been claimed. If Entrepreneurs’ Relief was available on the gain deferred it will also be available when the gain comes back into charge for disposals on or after 3 December 2014.

(d) Capital Gains Tax Exemption

Any capital gains realised on a disposal of EIS qualifying shares after the three year EIS period, and on which EIS relief (see (a) above) has been given and not withdrawn, will be free from capital gains tax. Any capital gains realised on a disposal within the three year EIS period will be subject to CGT.

(e) Loss Relief against income or gains

Tax relief is available at any time in respect of any loss realised upon a disposal of EIS qualifying shares on which EIS income tax relief (see (a) above) has been given and not withdrawn. The amount of the loss (after taking account of any income tax relief initially obtained) can be set against the individual’s gains in the tax year in which the disposal occurs, or, if not fully used, against gains of a subsequent year. Alternatively, on making a claim, the loss net of income tax relief may be set off against the individual’s taxable income of either the tax year in which the disposal occurs, or the previous tax year. If the circumstances are such that EIS income tax relief have been withdrawn, it may still be possible for an investor to claim an amount of loss relief.

Where only CGT Deferral relief has been claimed, loss relief against income tax may be restricted due to the cap on income tax reliefs.

(f) Inheritance Tax – Business Property Relief

Although not an EIS tax relief as such, an investment in an EIS qualifying company will normally qualify for 100% relief from IHT under current legislation, provided the investment has been held for at least two years and is still held at time of death. There is no upper limit on the amount of IHT relief which can be claimed.

Trusts

Reliefs are available to UK resident Investors as trustees of discretionary or life interest trusts. Apart from being attractive to individual Investors who are UK resident for tax purposes.

Capital Gains Deferral, as described above, can be claimed on the amount subscribed for shares in EIS qualifying companies against any chargeable gains if the investment is made within one year before and three years after the date of the disposal which gives rise to the gain or the date upon which a previously deferred gain crystallises.

Loss Relief is available under the normal capital loss rules in respect of any losses incurred on investments made by investors.

Inheritance Tax: discretionary trusts can benefit from BPR on EIS investments, provided they have been held by the trustees for two years.

Example One: An investor subscribes £100,000 for shares in the 2020/21 tax year. In the 2019/20 tax year he had realised a capital gain of £50,000, which was taxable at 28%. The investor pays income tax at a rate of 45%. In the 2024/25 tax year more than three years after the EIS investment, the investor sells his shares for £150,000.

The outcome is as follows, depending upon whether the investor is able to claim EIS relief, or no relief at all:


E.I.S No relief
 Subscription price £50.000  £50,000 
Income tax relief £15,000 -
CGT deferral £14,000 -
Net cost of shares £21,000 £50,000
Sale proceeds £150,000 £150,000
CGT deferral claw back £10,000 -
CGT on sale - £20,000
Net gain £119,000 £80,000

Example Two: The facts are as in the previous example, except that the investment unfortunately fails completely and is wound up in 2024, with the investor receiving no money back:


E.I.S No relief
Subscription price £50.000 £50,000
Income tax relief £15,000 -
CGT deferral £14,000 -
Net cost of shares £21,000 £50,000
CGT deferral claw back £10,000 -
Income tax relief on loss £15,750 £22,500
Net loss £15,250 £27,500

Date for claiming tax relief

The relevant dates for income tax relief, from a tax year perspective, is the date on which an investment is made into a company. The latest date an investor can file a claim for EIS relief is five years after 31 January following the tax year to which the claim relates.

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