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EIS income tax relief: what is it and how does it work?

The Enterprise Investment Scheme (EIS) offers some of the most generous tax incentives available when investing in early stage companies. Among the most notable is EIS income tax relief.

Enabling investors to claim back almost a third of the value of their investment in income tax relief,. since its introduction, EIS income tax relief has helped the scheme attract over £26bn of investment.
As a result, for those considering EIS investments, understanding how this relief works can be crucial to maximising its effectiveness.

1. What is EIS income tax relief?

EIS income tax relief is a core tax incentive available under the Enterprise Investment Scheme (EIS). It enables investors to claim up to 30% income tax relief back from the sum of their investment and is widely regarded as the most generous relief offered by the EIS.
This relief can be claimed on up to a maximum of £1 million in EIS investment per tax year, rising to £2 million should all capital over £1 million be invested into knowledge-intensive companies [KICs]). In turn, this tax relief alone can reduce an individual's income tax bill by up to £600,000 per tax year.
For example: an investor invests £50,000 into an EIS-eligible opportunity. They receive their EIS3 form following share issue, submit their claim and have £15,000 deducted from the current or the previous tax year's income tax bill.  
To claim the full 30% tax relief, an investor must invest in an EIS-eligible investment opportunity. They must also ensure they hold the EIS shares for at least the three-year minimum holding period.

2. Can I carry back EIS income tax relief?

EIS income tax relief is – by default – is claimed against the income tax bill from the year in which the investment was made. However, it is also possible to carry back the relief to a previous tax year.
EIS carry back relief enables an investor to claim the income tax relief they are due against the previous tax year's liabilities. Should it be preferable, they can split the relief across the two years.
This feature can be useful should an investor have not accrued sufficient tax liabilities in the year the investment was made. Equally, it can be effective should the individual have already utilised tax relief for the extent of their liabilities that tax year.
For example: an individual invests £100,000 into an EIS-eligible investment opportunity in the 2023/24 tax year. However, they have not accrued sufficient tax liabilities in that year to claim the relief against it. They instead choose to claim the £30,000 tax relief they are due against their 2022/23 income tax bill.

Access: Free Guide to the Enterprise Investment Scheme

3. Is there a limit to the amount of EIS income tax relief I can receive?

The maximum amount of EIS income tax relief an investor can claim per year is £600,000. This is due to the maximum annual investment being £2 million, and the rate of EIS income tax relief standing at 30%.
Whilst the maximum an investor can claim in EIS income tax relief per year is £600,000, there is currently no lifetime cap for claiming the relief.
This significant potential for tax savings can make the EIS a particularly attractive route for high earners with considerable annual tax liabilities.


4. Who is eligible for EIS income tax relief?

Technically EIS investments are open to investors globally. However, in order to claim their income tax relief an individual must fulfil several criteria:
  1. UK residency (or UK tax commitments): investors must be a verified UK resident or have UK income tax liabilities against which they can claim relief.

  2. Sufficient income tax liabilities: investors must have accrued a sufficient level of income tax in the year their EIS shares are issued. In the case of carry back relief, this applies to the previous tax year.

  3. Not an employee: investors who are employed or are a partner of the company distributing shares are not eligible to claim income tax relief.


5. How can I claim EIS income tax relief?

The process for investing and claiming relief via the EIS will generally require the following three steps:
  1. Search for eligible opportunities: before claiming EIS tax relief, an investor must select an opportunity that qualifies for the scheme. These can be accessed either directly from the eligible company, via a co-investment platform or through an EIS fund.

  2. Invest in the opportunity: this process will differ depending on the provider. Direct investments will require more personal due diligence before investing. However, reputable co-investment platforms and funds may research, facilitate and monitor opportunities on the investor's behalf.

  3. Claim the tax relief: Once shares have been issued, EIS3 forms will be distributed to investors. Those that pay tax via PAYE (pay as you earn) can claim income tax relief by filling in the EIS3 form and sending it to HMRC to process. Alternatively, individuals can complete this on their self-assessment tax return.

Read More: How to claim your EIS tax reliefs: income tax

The below flowchart shows a typical EIS investment process for an investment into an individual company


6. When should I expect to receive EIS income tax relief?

How long it takes for an investor to receive their EIS income tax relief can depend on several factors. One of the most obvious (but crucial) is when the EIS3 form or tax return itself is returned to HMRC.

Investors are eligible to make their tax relief claim up to five years after EIS share issue date. Subsequently, the date this is submitted will play a significant role in when the relief is received.

Outside of the investor's remit, it can be useful to note that HMRC's processing times on tax relief can vary depending on their backlog. As a result, investors may experience a longer wait for their tax relief than expected.

Once these steps have been fulfilled, HMRC will then provide tax relief accordingly. This will either be by reducing the investor's income tax bill for the following year or by providing an income tax refund.


7. Is EIS income tax relief available for overseas investments?

The EIS's income tax relief is only available for investments in UK-based companies.

This means that for overseas investors looking to utilise EIS tax benefits, UK startup and scaleup opportunities should be explored.

Though the EIS tax incentives are only available for those that hold UK liabilities, in recent years the UK's reputation the startup capital of Europe has been reason enough to attract global investment.

In 2022 alone UK startups and scaleups attracted $30.8 billion in venture capital investment. This was the highest figure in Europe and higher than second place France and third place Germany combined.

Read More: How to invest in startups as a private investor


8. Benefits of EIS income tax relief

From risk minimisation to impact investing, some of the most significant investor benefits associated with with EIS income tax relief include:

  • Increased potential return on investment: income tax relief allows investors to reduce their overall tax liability, effectively increasing their return on investment. For example, if an investor receives a 30% income tax relief on their investment, it reduces the effective cost of the investment by 30%, leading to potentially higher overall returns.

  • Risk minimisation: Investing in early-stage companies carries inherent risks. EIS income tax relief provides a form of risk mitigation by reducing the financial burden on investors by almost a third (30%).

  • Access to additional tax incentives: by claiming EIS income tax relief, investors can gain access to additional EIS tax incentives. These include capital gains tax (CGT) exemption, CGT deferral, inheritance tax exemption and loss relief. Together, these can support investors in minimising risk, maximising returns, managing tax plans and planning for later life.

EIS Tax Incentive


30% income tax relief

Effective investor spend of 70p in the £1

Capital gains tax exemption

Zero CGT to pay when shares are realised (usually 20%)

Capital gains tax deferral

Ability to defer the payment of an existing CGT bill to later years

Inheritance tax exemption

Zero IHT to pay on shares upon passing (usually 40%)

Loss relief

Ofsset any potential losses by rate of income tax or CGT

  • Flexible tax planning: The EIS's carry back feature enables investors to carry back all or part of their income tax relief to the previous tax year. This flexibility can be advantageous for individuals with considerable tax liabilities that are keen to manage their finances optimally.

  • No impact on personal allowances: some investments, such as those involving dividend repayments, are eligible for income tax. Some, such as listed equities, are eligible for capital gains tax. Neither taxes apply to EIS shares when sold. In turn, an investor's income tax allowance and CGT allowance will not be impacted upon the sale of EIS shares.

  • Fuels innovation into UK SMEs: EIS tax reliefs are designed to incentivise investment into the UK's early-stage, high-growth businesses. By investing in the EIS and claiming tax incentives, investors can fuel the development of some of the UK's most innovative, impact-driven early-stage businesses.


9. Risks associated with EIS income tax relief?

The benefits associated with EIS income tax relief are numerous. However, individuals should also consider the potential risks that the relief and scheme as a whole can pose. The key risks investors should be aware of before investing in the EIS are:

  • Risk to capital: EIS investments involve investment into early-stage, unquoted businesses. Though this can enable considerable growth, it can make investor capital more susceptible to risk than with investments into mature companies.

  • Lower liquidity: the EIS is a long-term investment product and has naturally low liquidity in comparison to asset classes such as listed equities. Whilst this means an investor could wait five to ten years for a return, the scheme's passive nature and often higher target returns can make it a preferable route for certain investors.

  • Regulatory Changes: the rules surrounding EIS reliefs can be subject to changes by the Government. There have been no negative changes to the EIS since its introduction in 1996, and none are currently forecasted. However, it is still important for investors to bear this caveat in mind.

  • Personal Tax Considerations: EIS income tax relief relies on the investor having accrued sufficient income tax liabilities in the year of – or prior to – share issue. If investors have not accrued sufficient income tax liabilities in either of these periods (or already utilised relief on them), they may not receive their full 30% income tax relief.


10. Accessing the most appropriate EIS investment

Income tax relief forms just one part of the Enterprise Investment Scheme, and several other factors are likely to play a role in an investor's decision outside of it. Many of these will depend upon investor attributes and ambitions.

Where experienced investors and high-net-worth individuals may prefer the ability to select their own individual EIS investments from a co-investment platform and benefit from the comparably higher returns they target, those with limited investment experience may prefer the less autonomous approach that EIS funds offer.

But regardless of growth goals, sector preference or tax plans, one task any individual considering EIS investments can benefit from is learning as much as possible about the scheme prior to investing – whether that be via online resources, a personal tax adviser, or both.

To support this process, we have created a comprehensive guide to the Enterprise Investment Scheme. Offering an extensive overview of the scheme, its tax reliefs, risks, rewards, routes for access and more. You can download the guide for free here.

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