EIS (Enterprise Investment Scheme) tax relief is a benefit for investors in the UK. The government created this scheme to encourage people to invest in small and growing businesses by offering tax savings. But how does the EIS tax relief scheme work? It provides various tax incentives that make investing in startups more appealing.
Here’s how it helps:
- Investors can get 30% income tax relief on investments up to £1 million per year.
- No capital gains tax (CGT) when selling EIS shares.
- Businesses can raise up to £12 million through EIS and similar schemes like SEIS (Seed Enterprise Investment Scheme).
- You can claim tax relief from both EIS and SEIS in the same year.
Since investing in smaller businesses can be risky, these tax benefits help make it more attractive.
Want to make sure your investment records and tax filings are handled correctly? SAS KPO Services provides expert outsourcing solutions to help you manage financial reporting and tax compliance with ease.
Why do Smart Investors Choose EIS Tax Relief?
The Enterprise Investment Scheme (EIS) is a UK government initiative designed to encourage investment in small and growing businesses by offering generous tax incentives. If you’re looking to invest wisely while minimising tax liabilities, here’s how EIS can benefit you:
Save on Income Tax
You can claim 30% income tax relief on investments up to £1 million per year. If you invest in knowledge-intensive companies, this limit increases to £2 million—a great way to reduce your tax bill.
Protection Against Losses
Investing in startups carries risks, but EIS offers a safety net. If your shares lose value and you sell them at a loss, you can offset that loss against your income tax, helping you recover some of your investment.
Capital Gains Tax (CGT) Exemption
Hold onto your EIS shares for at least three years, and any profits you make when selling them will be completely free from CGT—letting you keep more of your earnings.
CGT Deferral on Reinvestments
If you’ve made a capital gain from selling another asset, you can reinvest it into EIS-qualifying shares and defer the CGT payment, giving you more control over your tax liabilities.
EIS is a powerful tool for investors looking to support innovation while enjoying valuable tax relief. With tax savings, loss protection, and CGT benefits, it’s a smart way to grow your portfolio while reducing financial risk.
Understanding EIS Tax Relief: A Smart Way to Invest
The Enterprise Investment Scheme (EIS) offers generous tax benefits for investors who support small and growing businesses in the UK. If you’re looking for ways to save on taxes while investing wisely, here’s what EIS tax relief has to offer:
Income Tax Relief
There’s no minimum investment required, and you can claim 30% tax relief on investments of up to £1 million per tax year. That means if you invest the full amount, you could reduce your tax bill by £300,000—as long as you have enough tax liability to cover it.
If you choose to invest in knowledge-intensive companies (businesses focused on innovation and research), you can invest an additional £1 million with the same 30% tax relief. However, all shares must be held for at least three years to retain the tax benefit.
Capital Gains Tax (CGT) Disposal Relief
If you hold your EIS shares for at least three years, any profit you make when selling them is completely tax-free. This makes EIS an attractive long-term investment option.
Loss Relief: Reducing Investment Risks
Not every investment will succeed, but EIS helps protect investors. If you sell your EIS shares at a loss, you can offset that loss against your income tax for the same or previous tax year. This provides greater flexibility than simply offsetting it against capital gains.
Capital Gains Tax Reinvestment Relief
Wondering how does the EIS tax relief scheme work when it comes to reinvesting profits? If you have gains from selling other assets, you can defer paying CGT by reinvesting those gains into EIS-eligible shares. You must reinvest within one year or three years after the gain awoke.
How the EIS Tax Relief Scheme Works?
The Enterprise Investment Scheme (EIS) is a way for investors to get tax benefits when they invest in certain companies. But how does the EIS tax relief scheme work? Let’s break it down in simple terms:
Investing in Companies
Investors put their money into businesses that qualify for the EIS scheme by buying shares in them. These are small, growing companies that need funding to expand.
Tax Relief on Investment
The government rewards investors by offering tax relief on the money they invest. This means a percentage of the amount they put in can be deducted from their tax bill, helping them save money.
Capital Gains Tax Deferral
If an investor has made a profit by selling an asset (like property or stocks) and they invest that profit into an EIS-approved company, they can delay paying capital gains tax on that profit. This helps manage tax payments more efficiently.
Protection Against Losses
Not every investment is successful. If an investor sells their EIS shares at a loss, they can offset that loss against their taxable income. This means they pay less tax, reducing the financial risk of investing.
The EIS tax relief scheme is designed to encourage investments in new and innovative businesses while giving investors valuable tax benefits. It’s a win-win for both growing companies and those looking to make smart financial decisions.
How to Claim Tax Relief on Investments in Startups?
If you invest in a startup through a government-backed scheme, you may be eligible for tax relief. But to benefit from this, you need to follow the right steps. Here’s a simple breakdown of how to claim tax relief on your investment.
When to Claim
Investors can claim tax relief after the company’s funding round is complete. The claim must be made within five years from 31st January following the tax year of the investment.
One important thing to note: If you don’t use your full investment allowance for tax relief in a given year, you can’t carry it forward. However, you can backdate it to the previous tax year if needed.
Steps for Startups Before Investors Can Claim Tax Relief
Before investors can claim their tax benefits, startups must go through a few steps to confirm their eligibility:
Step 1: Submit a Compliance Statement
The startup must operate for at least four months before submitting a compliance statement to HMRC. This confirms that it meets the necessary conditions to qualify for tax relief.
Step 2: Receive Confirmation from HMRC
Once the application is reviewed, HMRC sends an approval letter containing a unique reference number for the investment. This process usually takes a few weeks.
Step 3: Provide Compliance Certificates to Investors
After approval, the startup issues official tax relief certificates to investors. These certificates serve as proof of eligibility when claiming tax benefits.
How Investors Can Claim Their Tax Relief
Once an investor receives the compliance certificate, they can include it in their annual self-assessment tax return. The total amount invested in eligible schemes must be reported for tax relief to be applied.
By following these steps, both startups and investors can make the most of tax-saving opportunities while supporting innovative businesses.
Final Thoughts: Make the Most of EIS Tax Benefits
The EIS tax relief scheme is a great way for investors to save on taxes while supporting small and growing businesses. With benefits like income tax relief, capital gains tax exemptions, and loss protection, it’s a smart investment option for those looking to grow their wealth while minimising financial risks.
If you’re an investor, understanding how to claim EIS tax relief can help you maximise your returns. And if you’re a startup, ensuring your compliance with HMRC guidelines is crucial to attracting investors.
At SAS, we specialise in financial reporting, tax compliance, and investment record management, making the EIS process seamless for both businesses and investors. Whether you need assistance with tax filings or expert outsourcing solutions, our team is here to help.
Get in touch today! Let us handle your financial compliance so you can focus on what matters—growing your business.
Shivani Soni (Digital Marketing Specialist, Top Marketing Voice) writes this blog
