Tax Benefits That Make EIS Attractive
The 30% income tax relief is just the beginning, you can claim this against your current tax bill or carry it back to the previous tax year. Investors can claim income tax relief and claim tax relief on their EIS investments, directly reducing their income tax bill.
After holding shares for three years, any gain you make when selling is completely free from capital gains tax.If your EIS shares are sold at a loss, you can offset this against either income tax or capital gains tax, softening the blow of unsuccessful investments.
You can also defer capital gains tax on other assets if you reinvest the proceeds into EIS shares within certain timeframes. This is known as capital gains deferral relief or CGT deferral relief, and it allows investors to postpone paying capital gains tax by reinvesting gains into EIS qualifying shares. Reinvestment relief and deferral relief are valuable tools for tax planning, enabling investors to manage when they pay capital gains tax.
As a bonus, EIS shares become exempt from inheritance tax after you’ve held them for just two years. To benefit from these reliefs, investors must follow the correct procedures to claim EIS tax relief and pay capital gains tax only when required.
Common Mistakes When Claiming EIS Relief
Many investors forget to obtain their EIS3 certificate from the company – without this document, you cannot claim your tax relief. Before an EIS3 certificate can be issued, the company must submit a compliance statement to HMRC, and each certificate includes a unique investment reference used for tax purposes.
Some investors sell their shares too early, not realising that the three-year holding period is essential for maintaining the tax benefits. It’s easy to miss the claim deadline, you have up to five years after the 31st January following the tax year of your investment.
Another common error is investing in companies that don’t actually qualify for EIS, despite their marketing claims. Fund managers play a key role in ensuring investments meet EIS requirements, and similar rules apply to other schemes such as venture capital trusts, the Seed Enterprise Investment Scheme, social investment tax relief, and investment trusts.
I once advised a client who nearly lost £30,000 in tax relief because the company hadn’t secured proper EIS status before taking his investment.
How to Claim Your EIS Tax Relief
Once you’ve invested, the company should apply to HMRC for permission to issue EIS3 certificates to its investors. When you receive your EIS3 (usually 4-6 months after investing), you can claim relief through your Self Assessment tax return. You must claim EIS tax relief in the correct tax year for tax purposes, following current tax rules.
If you’ve already submitted your tax return, you can amend it online within 12 months of the filing deadline. For investments from previous years, you can still claim by writing to HMRC or including them in your next tax return. You can claim income tax relief and claim tax relief for the previous year if you meet the eligibility criteria.
Remember you can also ‘carry back’ your investment to the previous tax year, which is handy if you had a higher tax bill then. The carry-back option is only available if the same investment has not already been used to claim relief in another year.
