Understanding EIS Loss Relief: A Tax Lifeline for Investors

Alan Bermingham

10 Years of Expertise in Fintech Innovation

4 min read

Breaking It Down for You :

Let’s take a look together at how you can claim EIS loss relief and what the criteria are to make a claim.

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a government-backed initiative designed to encourage investment in early-stage, high-growth companies by offering a suite of generous tax benefits.

When you invest in EIS-qualifying companies, you’re not just supporting innovative UK businesses, you’re also unlocking valuable tax reliefs that can significantly reduce your risk.

One of the main attractions is upfront income tax relief: you can claim up to 30% of your investment back as a reduction on your income tax bill. For example, invest £10,000 and you could knock £3,000 off your income tax liability for that tax year.

On top of that, any capital gains you make from selling your EIS shares after three years are typically exempt from capital gains tax, provided the company remains EIS-qualifying.

EIS investments must be made in companies that meet strict criteria: they must be UK-based, have gross assets of less than £15 million before the investment, and employ fewer than 250 people.

These requirements ensure that EIS tax reliefs are targeted at smaller, innovative businesses that need funding to grow.

By offering income tax relief, capital gains tax exemption, and loss relief, the Enterprise Investment Scheme makes investing in early-stage companies more attractive.

These tax benefits are designed to encourage investment in qualifying companies, helping to fuel the next generation of UK business success stories.

What exactly is EIS loss relief?

EIS loss relief is a tax benefit that kicks in when your EIS investments don’t work out. Claiming EIS loss relief is a key benefit for EIS investors in EIS companies, as it allows you to offset losses against either your income tax or capital gains tax bill.

You can claim it when you sell your shares at a loss or when they become worthless, but only if your investment was a qualifying investment in an EIS qualifying company. This relief comes on top of the initial 30% income tax relief you got when you first invested.

For higher-rate taxpayers, the relief could be worth up to 45% of your loss. Maintaining EIS qualifying status is essential for investors to claim relief, as only investments in companies that retain this status are eligible. Combined with the initial relief, this means the government effectively shoulders a significant portion of your investment risk.

Think of it as the taxman’s way of saying, “We’ll share some of your pain if things go wrong.” As part of the process, EIS investors must claim EIS losses on their tax return, ensuring the investment meets the criteria of an EIS qualifying investment.

How to work out your loss

Calculating your EIS loss is straightforward. The 'net cost' of your investment is calculated as the amount you invested minus any income tax relief claimed or previously claimed. Take what you originally invested, subtract any money you got back, then deduct the initial income tax relief you received.

For example, if you invested £10,000 and claimed £3,000 in initial relief (30%), your effective cost (net cost) is £7,000 (invested minus income tax relief claimed).

If the company fails and your shares become worthless, your allowable loss is £7,000. In this situation, you can make a negligible value claim or nil value claim to HMRC to treat the shares as disposed of at nil value and claim loss relief accordingly.

The same principle applies to partial losses. If you sell shares for less than you paid, the difference (minus your initial relief) becomes your loss figure. How much loss relief you can claim depends on the rate of income tax or capital gains tax rate and your marginal rate. The relief amount is determined by multiplying your effective loss by your applicable marginal rate.

Keep good records of purchase dates, amounts, the original investment date, any disposal proceeds, and the market value at relevant points. You’ll need these when claiming.

Claiming against income tax

For most people, especially higher-rate taxpayers, claiming against income tax offers the biggest benefit.

You must have sufficient taxable income to offset the loss, and the relief can be applied to taxable income in the relevant tax year or the same tax year as the loss. You can offset your losses against your income tax bill for either the year of the loss or the previous tax year.

This flexibility is brilliant if your income varies year to year. If you have too much income tax paid, you may be eligible for a refund. You can choose whichever tax year gives you the best result.

To claim, you’ll need to complete the SA108 Capital Gains Tax pages in your Self Assessment. There’s a section specifically for “Unlisted shares and securities.” Make sure to fill out the self assessment form and provide your bank account details to receive any repayment.

There are limits – you can claim relief on losses up to £50,000 or 25% of your adjusted total income, whichever is higher. But for most investors, that’s plenty of headroom. Note that any loss relief claimed must be accurately reported to HMRC.

Claiming against capital gains

If claiming against income tax isn’t your best option, you can offset your EIS losses against capital gains, specifically 'chargeable gains', instead. This route has no annual limit.

You can use the loss against chargeable gains in the current tax year or carry it forward to offset gains in future tax years until you’ve used it up. This is particularly handy if you’ve exceeded the income tax relief limits.

To claim against capital gains, complete the capital gains pages of your Self Assessment. The process is similar to claiming against income, but the calculations differ.

This option works well if you’ve made significant chargeable gains in the year or expect to in future tax years.

Timing and conditions

You can only claim EIS loss relief when your loss has “crystallised” either when you’ve sold the shares at a loss or formally claimed they’re of “negligible value.”

Claims must generally be made within four years of the end of the tax year in which your loss occurred. Miss this window, and you lose your chance to claim.

Your original EIS investment must have met all the qualifying conditions, including being in an EIS company.

It is also essential that portfolio companies maintaining their EIS-qualifying status is ongoing, as this is required for investors to retain eligibility for tax relief. In most cases, you need to have held the shares for at least three years.

HMRC may ask for evidence of your original investment and subsequent loss, so keep all your paperwork safe. When a loss occurs, especially if the EIS company becomes worthless, informing HM Revenue is important to enable a negligible value claim.

Tax Year for Share Loss Relief

One of the key flexibilities of EIS loss relief is that you can choose which tax year to claim it in. You’re allowed to claim share loss relief either in the tax year the loss is realised or carry it back to the previous tax year. This gives you the opportunity to optimise your tax position, depending on where the relief will have the greatest impact.

If you claim the loss in the current tax year, you can offset it against either your income tax or capital gains tax liability. If you choose to carry the loss back to the previous tax year, it can only be set against your income tax for that year.

This flexibility allows you to tailor your claim to your personal circumstances, potentially reducing your income tax or capital gains tax bill in the most effective way.

Given the potential complexity and the importance of timing, it’s wise to seek professional advice to ensure you’re claiming loss relief in the most tax-efficient manner, taking into account your income tax liability, capital gains, and overall tax position.

Watch out for these common mistakes

Many investors miss out by failing to claim within the time limit. Four years might seem like ages, but it flies by! Similar reliefs are also available under the seed enterprise investment scheme (SEIS) for investments in early stage businesses, so be sure to check which scheme applies to your situation.

Another common error is not keeping proper records. It's important to track when an investment falls in value or when an EIS qualifying company fall occurs, as you’ll need this information if you make a negligible value claim or report a loss.

Some investors miscalculate their loss by forgetting to factor in the initial EIS relief they received. Remember, your loss is based on what you’re actually out of pocket.

I once helped a client who nearly missed out on £4,300 of relief because he’d forgotten about a tech startup investment that had quietly folded. We managed to submit just weeks before the deadline.

Choosing the wrong relief method can cost you too. Always run the numbers for both income tax and capital gains relief to see which gives you the better result.

Don’t forget – you need to have paid enough tax in the first place to claim the relief against. No tax paid means no relief available. Make sure any loss relief claimed is correctly reported to HMRC to avoid mistakes or delays.

Final Thoughts

EIS loss relief softens the blow when investments don't pan out. While no one invests hoping to use it, knowing it's there provides valuable peace of mind.

The flexibility to claim against either income or capital gains lets you tailor your approach to your personal circumstances. This can significantly reduce the real cost of investment failures.

Remember, the best time to understand these reliefs is before you need them. Planning ahead ensures you'll know exactly what to do if things don't go to plan.

Always consider speaking with a tax professional about your specific situation. The rules can be tricky, and personalised advice is invaluable.

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