Important: The information on this website is for sophisticated/HNW investors only. It is not a personal recommendation to invest. If you’re unsure, please seek advice.
EIS shares can be an interesting addition to an already well diversified investment portfolio. Whilst investing into earlier stage companies is typically higher risk than investing in large public companies, the reward and potential return is often significantly more attractive. Additionally, there is an element of risk mitigation and balancing as you do not need to pay income or capital gains tax on the returns from EIS shares, bonus tax rebates are given as a percentage of your investment irrespective of the performance of the shares, and in the event of a loss, you can recoup a portion of your principal via further tax rebates.
Income tax relief
Up to 30% income tax relief on investments up to £1 million. An additional £1 million is eligible if invested in knowledge-intensive companies.
CGT disposal relief
Any gain in Capital Gains Tax (CGT) free if the investment is held for at least three years.
Loss relief
If the shares are disposed of a loss, you can elect that the loss be set against any income tax of that year or of the previous year.
CGT reinvestment relief
All Capital Gains Tax can be deferred if the gain is re-invested in EIS-qualifying shares.
Any capital gain is CGT free if the shares are held for at least three years and the income tax relief on the shares was claimed. Shares can be held for much longer and potentially allow you to accrue a CGT exemption over a long period of time, which can be a great attraction.
There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it. EIS allowances are allocated individually. For example, a married couple could separately invest up to £2 million each tax year and be eligible for Income Tax relief. The main limitation is that all shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.
Assuming you have the allowance, you could ‘carry back’ – offset the tax relief against the previous year’s tax bill and potentially get back tax you’ve already paid.
Loss relief allows investors to offset a loss made on an EIS company against their income tax or capital gains tax bill.
To qualify for loss relief, the realised value of an investment must have fallen below what is called the ‘effective cost’. The effective cost is the amount invested minus the income tax relief already claimed from the EIS investment. For example, if £100,000 is invested and income tax relief of 30% (equal to £30,000) is claimed, the effective cost of the investment will be £70,000.
To claim loss relief, you must have sufficient tax liabilities to offset this against, and you must claim the relief within certain time limits.
You should be able to offset a loss against your income/capital gains tax 1bill for the current/previous tax year. The amount of tax relief you can claim is worked out by multiplying the value of the effective, or “allowable” loss by your marginal rate of income tax or the rate at which you pay capital gains tax.
As an example for offsetting against income tax, if the effective cost of the investment was £10,000, and the investment is eventually sold for £2,000, the allowable loss is £8,000. Assuming a marginal rate of income tax of 45%, the amount that could potentially be claimed as loss relief against income tax would be £3,600 (£8,000 x 45% = £3,600).
Alternatively, as an example for offsetting against capital gains tax, assuming a capital gains tax rate of 24%, if you make an effective loss of £8,000 the amount of loss relief against capital gains tax would potentially be £1,920 (£8,000 x 24% = £1,920).
Here are a few examples of how EIS tax relief works. Let’s assume you invest £100,000 in each case and you’re in the 45% tax bracket.
Scenario 1
The company does well and doubles its value, and you hold the shares for three years:
Investment = £100,000
Income Tax relief = £30,000 (as a reduction in your income tax bill)
Share sales = £200,000
Your gain = £130,000 (£100,000 profit from the sale plus £30,000 income tax relief)
Scenario 2
The company value stays the same
Investment = £100,000
Income Tax relief = £30,000 (as a reduction in your income tax bill)
Capital Gains Tax = £0
Your gain = £30,000 (from the income tax relief)
Scenario 3
The company closes and your shares are worth nothing
Investment = £100,000
Income Tax relief = £30,000 (as a reduction in your income tax bill)
At risk capital = £70,000
Loss relief on at risk capital @ 45% = £31,500
Your actual loss = £38,500 (£100,000 - £30,000 - £31,500)
