How to claim EIS tax relief
The Enterprise Investment Scheme (EIS) is an excellent way for companies to mitigate risk on more ambitious investments by allowing investors to claim generous tax reliefs.
Once you know what you need, claiming EIS tax relief is reasonably simple. In this guide, we’ll break down everything you should have on hand.
The process of EIS tax relief:
First let’s break down what the different stages of the process are and what each Enterprise investment scheme form is used for:
- EIS1 Compliance Statement marks a company’s initial application to HMRC
- EIS2 form is the official approval from HMRC that the company is EIS compliant. It contains the Unique Investment Reference (UIR) number that investors require to be able to claim tax relief
- EIS3 Compliance Certificates are the method by which investors actually claim tax relief when completing the “additional information” section of their tax return for the current tax year
- EIS5 Compliance Certificates are what you will fill out instead of an EIS3 when you are using a fund manager as opposed to applying yourself
Investors can claim income relief on up to £2 million per tax year. However, any tax relief claimed after the first £1 million must be on assets in either one or multiple knowledge-intensive companies often referred to as KICs.
Other tax reliefs include:
- Up to 30% income tax relief on the total amount of eligible EIS investments
- No Capital Gains Tax (CGT) when you sell or dispose of the shares
- Loss relief against income tax or CGT bill when the shares have lost value
- Deference of the Capital Gains Tax you would normally pay when disposing of the asset
The company invested in will have to remain EIS compliant for 3 years in order for someone to be eligible for reductions to their income tax bill. This means they cannot engage in activities that would revoke their compliance such as property development, accounting and providing legal services.
What you need to have on hand to claim EIS tax relief as an investor
You’ll need information contained in the EIS2 Certificate for any qualifying investments made, so it’s best to have these to hand. You’ll also need to provide:
- Any EIS company names that you have investment in
- The amount you are claiming tax relief on for each company
- Share issues date. Note: this can differ from the date the investment was made
- Details on which HMRC office originally issued the EIS2
- The EIS2 reference number found on each certificate
- A completed EIS3 claim form
You should add up the total amount of investment you have in any EIS qualifying company when you make your tax return. This figure will be used to calculate the total amount of EIS income tax relief you are eligible for.
Each investment will still need to be entered separately into box 19 TR7 of your tax return. In some circumstances, it can take HMRC a few months to issue EIS2 and EIS3 claim forms to the companies you have invested in after the shares issue date. However, often this will take just a week or two.
If you’ve invested in shares that have already been issued but you have not yet received an EIS3 or EIS5 form you cannot yet claim tax reliefs for those investments and you’ll have to wait until you receive the forms. If you receive them after you’ve already sent your tax return, you can complete the claim form and send it to HMRC retroactively.
There are currently three ways to claim income tax relief on EIS investments on an approved investment fund, which we cover in the next sections.
How to claim EIS tax relief on your paper tax return
If you complete paper tax returns to claim tax reliefs, you’ll have to fill in the additional information sheet. The section is called SA101 and must be included with the rest of the tax return.
You’ll also have to send HMRC the EIS3 claim form for all investments relief is being claimed. However, you must retain the EIS2 certificate. Keep this in a secure place as HMRC may request it in the future.
How to claim EIS tax relief in your online self-assessment form
Claiming EIS if using the online self assessment tax return is straightforward. You’ll simply tick ‘yes’ when prompted in section 3 to answer ‘Do you want to claim other tax reliefs and deductions?’.
Alternative way to claim EIS tax relief
You can also claim relief outside of your tax return by directly sending HMRC an EIS3 claim form completed along with the EIS2 certificate.
This is ideal if you want to claim tax relief against the previous year or if you did not receive your EIS3 form or EIS5 form time to claim relief when completing your regular tax return.
It’s also the preferred route if you pay tax at source via PAYE and don’t file returns for each tax year. You can receive the relief through an adjustment to your income tax code.
How to qualify for EIS income tax relief
Anybody can claim EIS relief on qualifying investments unless any of the following criteria apply:
- You subscribed to the shares for non-commercial purposes such as a scheme to avoid tax
- You received a loan that was given to you because of your investment
- You have been granted an option to require somebody else to buy your shares
- You are subject to “replacement capital” rules which apply to previous business owners
- Arrangements have been made that guarantee a return on your investment
- Arrangements have been made that protect against the normal risks involved with the kind of investment you have made
- You received shares after November 2015 and already held extra shares in the business that weren’t subscriber shares
You must also not be connected with the company at any time in the two years leading up to the shares being issued.
Connection in this instance means that you or an associate:
- Were an employee or director of the business and its subsidiaries.
- Controlled the business
- Possessed more than 30% of the share capital within the business
- Would be entitled to more than 30% of the businesses assets were it to wind up
When do you claim EIS tax relief
When you receive EIS relief will depend on how you are claiming relief.
If you are claiming it when completing your regular tax return, you will claim it in the normal time frame of your accounting period for tax purposes. This is usually 12 months.
While the relief is generally available for the tax within the accounting period they were issued, you can also choose to treat part of or all shares as issued in the previous year and claim relief for that year’s tax bill.
All EIS3 and EIS5 forms will contain a date of issue if the aforementioned route is viable. If choosing to claim via the forms themselves and not on a tax return, you can send these whenever you choose.
How much relief you get for your subscriptions for shares
Relief is set at a rate of 30% on the total amount claimed for any issue of shares in the current tax year. This is calculated after factoring in if any shares are to be treated as issued in a previous year.
You can decide for the relief to be applied only to certain shares at the full amount or distributed proportionally between all EIS qualifying shares you hold.
If you’ve received value from your investment in the business, the amount of income tax relief you can claim may be restricted. This figure will be noted on the EIS3.
It’s also worth bearing in mind that if your personal income tax liability is not high enough to absorb all relief available, you will not receive this excess and must forgo it. It cannot be applied to a previous tax year, for instance.
EIS tax relief is a fantastic way to mitigate risk when investing as can massively reduce an overall tax bill. For support throughout the process of application, get in touch with accountants at Sleek.
Yes, you can claim EIS online by claiming it as part of your regular online self-assessment form when making a tax return. Tick ‘yes’ when prompted in section 3 to answer “Do you want to claim other tax reliefs and deductions?”
You can claim EIS relief for up to 5 years from the end of the following January after you initially made the investment.
Yes, you can back date EIS if the forms do not arrive in time for you to include when making your tax return. You can also request to apply your EIS relief to the previous year.