EIS Loss Relief Explained

An overview of how loss relief under the Enterprise Investment Scheme works, including calculations and the claiming process.

⚠ Disclaimer:
This is a brief overview of EIS loss relief, including the basics of how it can be calculated and claimed. It is not a personal recommendation or tax advice. If you are unsure, please seek professional tax advice. Tax rules can change and benefits depend on circumstances.

Investing in young, entrepreneurial companies can offer significant rewards, but also carries risks. While some investments may deliver substantial returns, others might lose value or even fail entirely.To mitigate potential losses, the Enterprise Investment Scheme (EIS) provides tax relief known as “loss relief.” Investors may claim this relief for individual EIS investments that have fallen in value, even if their overall EIS portfolio has performed positively.Below is an overview of EIS loss relief, how it’s calculated, and how it can be claimed. This information is intended for guidance only and is not personal financial or tax advice. Always consult a professional adviser to confirm how this applies to your circumstances.

What is EIS Loss Relief?

EIS loss relief enables investors to offset losses from an individual EIS investment against their income tax or capital gains tax liabilities.

To qualify, the realised value of an EIS investment must have dropped below its “effective cost.” The effective cost is calculated as the original investment amount minus any EIS income tax relief previously claimed. For instance, if you invest £100,000 and claim 30% income tax relief (£30,000), your effective cost is £70,000.

Loss Relief Against Income Tax

You can offset allowable EIS losses against your income tax bill for the current or previous tax year. The tax relief is calculated by multiplying the allowable loss by your marginal income tax rate.

Example:
Effective investment cost: £10,000
Value at sale: £2,000
Allowable loss: £8,000
Income tax rate: 45%
Income tax relief: £3,600 (£8,000 x 45%)

Loss Relief Against CGT

Alternatively, losses can be offset against your capital gains tax liability for the current or future tax years. The relief is calculated by multiplying the allowable loss by your applicable CGT rate.

Example:
Allowable loss: £8,000
Capital gains tax rate: 24%
CGT relief: £1,920 (£8,000 x 24%)

What Happens to Deferred Capital Gains?

If you deferred a capital gain when investing in EIS shares, this deferred gain becomes chargeable when the shares are sold or the company is liquidated. The original gain is treated as arising anew at the date of disposal and must be declared in your tax return. You may use your annual CGT exemption or offset the EIS loss against this deferred gain.

Important Points to Remember

Loss relief does not eliminate losses entirely
Due to the high-risk nature of EIS investments, the value may decrease significantly or become worthless. Although loss relief can mitigate these losses, it does not eliminate them completely.
Tax rules can change and depend on personal circumstances
Tax relief eligibility depends on individual circumstances and is subject to changes in legislation. Relief also relies on companies maintaining their EIS-qualifying status.
Loss relief is not transferable upon inheritance
Beneficiaries who inherit EIS shares cannot claim loss relief available to the original investor. HMRC treats inherited shares as acquired at their market value at the date of death, potentially allowing beneficiaries to claim subsequent losses as capital losses only.
Making a negligible value claim
If an investment’s value becomes negligible (close to or at zero), investors can make a negligible value claim. This involves notifying HMRC that the shares are effectively worthless, allowing you to crystallise and claim the loss.

How to Claim Loss Relief

Loss relief can be claimed through your self-assessment tax return by completing the relevant section (form SA108). You can claim retrospectively, potentially resulting in a refund from HMRC if you have overpaid income tax in previous tax years.

If you are unsure about any aspects of loss relief or how it may apply to your personal circumstances, please consult a professional tax adviser.

Key Takeaways

EIS loss relief helps offset individual losses against income tax or CGT.
Always calculate your “effective cost” before determining your allowable loss.
Claiming against income tax can sometimes offer a higher rate of relief.
Capital gains deferred through EIS become chargeable upon disposal of shares.
Tax rules can change, so it’s important to stay updated and seek professional advice.

Conclusion

EIS loss relief is a valuable tool for investors seeking to mitigate the risks of investing in early-stage companies. By understanding how to calculate and claim this relief, you can reduce your potential losses and better manage your tax liabilities. As with any investment strategy, it’s essential to consult a qualified professional to ensure you’re taking advantage of all available tax benefits and adhering to current regulations.