A Complete Guide to Claiming EIS Tax Reliefs

The Enterprise Investment Scheme (EIS) is a powerful tool designed to encourage investment in early-stage, high-risk businesses by offering a range of tax incentives. These reliefs not only reduce the immediate tax burden but also offer long-term advantages in estate and capital planning, making EIS investments more appealing to investors.

This guide will provide a clear explanation of how to claim EIS tax reliefs, covering:

• Income Tax Relief
• Capital Gains Tax (CGT) Deferral and Exemption Relief
• Inheritance Tax Relief
• Loss Relief

Claiming EIS Income Tax Relief

To claim income tax relief under EIS, you first need to obtain an EIS3 certificate from the company in which you’ve invested. This certificate, issued by HMRC, contains essential details of your investment and confirms that it qualifies for tax relief. Once you have the EIS3 certificate, you can claim the relief in the following ways:

• Self-Assessment Tax Return: If you file a self-assessment, include the details of your EIS investment on your tax return. In the “Other Tax Reliefs” section, enter the amount you’ve invested (not the amount of relief, which will be calculated for you). If you’ve already received some relief during the tax year, include it here.
• PAYE: If you are paid through PAYE and do not file a self-assessment, you can claim the relief by adjusting your PAYE code. Complete the third and fourth pages of the EIS3 certificate and send them to your HMRC tax office for processing.

It’s important to note that income tax relief can only be carried back for one year and cannot be carried forward into future tax years.

Claiming Inheritance Tax Relief

Inheritance Tax (IHT) can be a concern for many individuals, but EIS investments can help mitigate the impact. If the shares are held for at least two years, they qualify for Business Property Relief (BPR), which exempts them from IHT. This means that EIS shares can be passed on to heirs without reducing the tax-free threshold, potentially saving thousands in taxes.

For example, if £100,000 of EIS shares increase in value to £160,000 by the time of death, the £64,000 in IHT owed on those shares can be avoided. Additionally, the income tax relief of £30,000 will also reduce the overall IHT liability, making EIS a valuable tool for estate planning.

How to Claim Capital Gains Tax Reliefs

EIS offers two key CGT reliefs: CGT Deferral Relief and CGT Disposal Relief.

• CGT Deferral Relief: This allows you to defer paying tax on capital gains from the sale of other assets if the proceeds are reinvested into EIS-eligible shares. This relief gives you the flexibility to delay tax liabilities, providing more time to manage your tax situation.
• CGT Disposal Relief: If you sell your EIS shares after holding them for at least three years, you may be able to claim CGT Disposal Relief, which exempts any gains from capital gains tax. This means that when you sell your EIS shares at a profit, you won’t have to pay the standard CGT rates on the sale.

Both of these reliefs are highly beneficial for reducing tax on gains, but you must ensure that you meet the necessary holding periods and conditions to qualify.

Claiming CGT Deferral Relief

To claim CGT deferral relief, you need to have received your EIS3 form from the company in which you’ve invested. The form includes details of your investment, and you must attach it to the capital gains section of your tax return. This claim must be made in the same year that the gain occurred, or up to five years after the issuance of the EIS shares.

Claiming CGT Disposal Relief

To qualify for CGT Disposal Relief, you must hold the EIS shares for a minimum of three years. This period aligns with the requirement for income tax relief. As long as you meet this holding period and have claimed full income tax relief on the investment, you can claim the disposal relief when you sell the shares. The relief will apply automatically, but you should still include the details of the sale in your tax return.

Loss Relief on EIS Investments

If your EIS investment does not perform as expected and the value of your shares declines, you may be able to claim EIS Loss Relief. This allows you to offset the loss against your income or capital gains, potentially reducing your overall tax liability.

• Loss Against Income: If your shares become worthless, you can offset the loss against income from the current or previous tax year using the SA108 form.
• Loss Against Capital Gains: Any excess loss can be carried forward to offset future capital gains, reducing your CGT liability in the years to come.

Loss relief is capped at £50,000 or 25% of your adjusted total income. However, there is no time limit for carrying forward losses to offset future gains, making this a valuable option for investors with ongoing capital gains.

Practical Steps to Claim EIS Tax Reliefs

To claim EIS tax reliefs, the key document you need is the EIS3 certificate. This certificate provides all the necessary details about your investment and serves as the foundation for any tax relief claims.

For income tax relief, once you have your EIS3 certificate, you can either file a self-assessment tax return or submit it for a PAYE adjustment. For CGT deferral and disposal reliefs, you need to include the relevant details in your capital gains tax summary.

Each claim has specific deadlines. For income tax and CGT deferral reliefs, claims must be submitted within five years of the 31st January following the tax year in which the shares were issued. Similarly, the holding periods for each relief must be met to qualify for the full tax benefits.

Final Thoughts

The Enterprise Investment Scheme provides valuable tax benefits that can significantly enhance your investment returns. From immediate income tax relief to long-term advantages like inheritance tax relief and CGT exemptions, EIS offers multiple ways to reduce your tax liabilities. By understanding the process for claiming these reliefs and ensuring you meet the necessary holding periods, you can maximize your benefits under the scheme.

Remember to keep detailed records of your EIS3 certificates and consult with a tax advisor to ensure that you are making the most of the reliefs available to you. By taking the time to plan your claims properly, you can enhance your overall tax efficiency and contribute to the growth of innovative businesses in the UK.