Are EIS Investments Tax-Free?

EIS investments are high risk. You are investing in early-stage tech-focused businesses, and as such, you need to be comfortable with the level of risk and the lack of liquidity for approximately 5-7 years. However, for those that are comfortable with the risk, HMRC provides some very attractive tax relief benefits, including:

• 30% income tax relief. Your income tax bill can be reduced by 30% of the amount invested into EIS.
• Tax-free gains on exit. No CGT to pay on exit, so long as the shares have been held for at least three years.
• CGT deferral relief, where if you owe tax on another gain, this can be deferred indefinitely by investing the gain element into an EIS.
• Loss relief. If your EIS underperforms, you can offset any losses against other income or capital gains.
• Inheritance tax relief. If EIS shares are held for two years, and still held at the investor’s death, EIS shares will be exempt from inheritance tax due to qualifying for Business Property Relief (BPR)
• Business Investment Relief – UK resident, non-domiciled investors can use offshore funds to invest via EIS, without having to pay the remittance tax charge.

Some of the most popular questions around EIS tax reliefs are as follows:

Do you pay CGT on EIS shares?

EIS shares will not be liable for Capital Gains Tax, so long as they have been held for a minimum of three years. When you invest in an EIS you will receive an EIS3 certificate. On page 1 of the certificate, you will find the “termination date”. This is the three-year holding period threshold.
Should EIS share be sold within the three-year window, CGT will be payable upon disposal, and HMRC will seek to reclaim any initial income tax relief given.

It is also important to note that the CGT exemption on EIS shares can only be realized if you have claimed income tax relief on the initial investment. You do not have to claim the full 30% entitlement to achieve eligibility.

Who is eligible for EIS tax relief?

There are rules around eligibility criteria for investee companies. However, here we will focus on the eligibility criteria for individual investors that are interested in investing in EIS-qualifying companies.

To be eligible you have to be a UK resident and UK taxpayer. You cannot be connected to, or have a controlling interest (over 51% ownership) of the business in which you are investing in to – this is to ensure that the businesses receive funding from “external” investors. HMRC rules define connected parties as business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives are defined as spouses and civil partners, parents and grandparents, children and grandchildren. However, the list does not include family members such as brothers and sisters, aunts and uncles, nephews and nieces, unmarried partners, and in-laws. This leaves some scope to attract investment from one’s extended family

How to claim EIS tax relief?

There are two main ways to claim income tax relief. Investors can either claim their tax relief using their self-assessment form completing the section ‘other tax reliefs’ and completing the additional questions relating to the EIS investment. Alternatively, investors can claim using the EIS3 certificates which are issued to them when the investment is completed. The EIS3 certificate contains sections on which investors can claim income tax relief and also CGT deferral relief.

How many years can you carry back EIS relief?

This is a multi-faceted question. For initial income tax relief, you can claim tax relief against income tax liable in either the current tax year or the previous tax year.

For CGT deferral relief you can defer a gain of any size by investing the gain element into EIS-qualifying shares. The original disposal needs to have been made up to three years before, or one year after the EIS investment has been completed. You can defer a gain even if you have already paid the tax.

For loss relief, if claiming against income, it must be claimed against your income tax bill in either the current or previous tax year, with the claim being made a maximum of one year from the 31st of January, after the tax year in which the loss was made. If claiming against CGT, it will initially be offset against any capital gain made in the current tax year, with any excess carried forward to future tax years, and set against the first available gain. The claim in this instance needs to be made within 4 years after the end of the tax year in which the loss was made.