The Enterprise Investment Scheme (EIS) is a UK government scheme that helps, higher-risk businesses (generally start ups) raise finance by offering tax reliefs to investors who meet the relevant criteria.
Investors can claim EIS relief on up to £1m-worth of investments in qualifying companies per person per year (this cap rises to £2m if you’re investing in knowledge-intensive businesses, such as those in the life sciences sector). In addition, there is a carry back option. This can enable investors to apply EIS relief to the preceding tax year.
An overview of the main benefits of EIS are summarised below:
- Income Tax relief of 30% of your investment, to be utilised in the year in which the investment was made, or to be carried back to the prior tax year
- Capital Gains exemption on profits earned on the disposal of EIS shares held for at least three years
- Loss relief, should the investment not work out
- Capital Gains Tax (CGT) deferral on gains crystallised on the disposal of any asset which is subsequently reinvested in an EIS eligible company
- Inheritance Tax exemption on shares held for a minimum of two years
Income Tax relief
Investors can claim 30% tax relief on qualifying EIS investments. The claim is capped at £2m of investment per tax year as long as at least £1m is invested in knowledge-intensive businesses (for example a company in the life sciences industry).
The resulting tax reduction could therefore be up to £600,000, provided you have sufficient Income Tax liability to cover it.
The shares must be held for at least three years from the date of issue – tax relief will be given at the outset, but can be clawed back if the shares are sold before the end of this period.
Capital Gains Tax exemption
Any gains made on the disposal of EIS are exempt of Capital Gains Tax provided the shares have been held for at least 3 years, and income tax relief has been claimed.
Loss relief allows investors to offset a loss made on an EIS investment against either their Capital Gains Tax liability or their Income Tax liability. The relief can be claimed in the current or the following tax years.
Claiming EIS tax relief
In order to make a claim for EIS relief, you must have received an EIS3 form. In your case, this will be issued by Crowdcube, once they receive confirmation from the UK tax authorities that they are able to issue them.
This form confirms the amount that has been invested in Travala and will also state that the investment is eligible for tax relief. HMRC can ask to see a copy of your form EIS3 at any time (even after the claim for relief has been processed).
A claim for EIS relief can be made on your UK Self-assessment tax return for the tax year in which the shares were issued.
If the shares were issued in a previous tax year, or if the claim that you are making is for capital gains deferral relief, the claim part of the form must also be completed and sent to your tax office.
Taxpayers are able to make claims for relief up to five years after the first 31 January immediately after the end of tax year in which the investment was made. Remember, you may also carry back relief on all or part of the investment to the preceding tax year, as long as the limit for EIS relief has not already been exceeded.
Once you have your EIS3 you can utilise the information to complete your tax return claim
The claim on your tax return is carried out as follows:
- Go to the section of your tax return titled ‘additional information’
- In box Number 2 on Page 2, enter the total amount you invested into EIS companies for which you wish to make a claim for tax relief
- Go to Page 4 – in the box which states ‘Please give any other information in this space’, enter the following information; company names (i.e. Travala Limited), the amount for which you’re claiming relief, the share issue date and the HMRC office issuing your EIS3 certificate
- You do not need to complete pages 3 or 4 of the EIS certificate and you do not need to send the EIS certificate to HMRC along with your return. However, as mentioned above, HMRC may request to see it to support your claim so do keep it in a safe place
If you do not usually complete a tax return or are employed under Pay As You Earn (PAYE) Tax
If you are employed under PAYE you will not usually complete a self assessment tax return. In this instance, you must complete pages 3 and 4 on the EIS certificate and send these by mail to the HMRC office dealing with your tax deductions. The relevant HMRC office should be stated on form EIS3.
If you require any assistance with processing your claim for tax relief, please contact Steph Gemson on [email protected]