What is the Enterprise Investment Scheme (EIS)?

Crowdfunding Freetrade 🙏
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Just creating a new thread for some information on EIS (Enterprise Investment Scheme) given the upcoming Crowdcube round.

What is EIS?
The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs launched in 1994 in succession to the Business Expansion Scheme. It is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.

How can I claim EIS on my Freetrade investment?
Visit the HMRC page for information on claiming EIS

Who is eligible for EIS? (View full list here)

  • The investor may not have more than a 30% interest in the company
  • No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
  • The investor must not have any form of preferential shares
  • The investor must not have any other form of controlling interest in the company
  • The scheme must not be used for the purposes of avoiding tax

Examples of EIS relief
View examples based on a £10k investment here

Sources
Wikipedia - Enterprise Investment Scheme
Crowdcube - Enterprise Investment Scheme (EIS) Overview

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Really great idea to include this @tommy

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So how does this apply to A shares?

The investor must not have any form of preferential shares

  • are A shares preferential?

The investor must not have any other form of controlling interest in the company

  • A shares give voting rights, does this apply?
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A Shares are not preferential, normally that refers to getting your money first in the case of a liquidation event. I’m sure the @freetrade_team can confirm?

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@saf this is also my understanding. Additionally, covering preference with respect to dividends and redemption rights within the scope of EIS issued shares. Clarity from @freetrade_team would though be :ok_hand:t2:

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Thanks @saf.

are A shares preferential?

No, this type of share has a technical purpose. No relevance to Freetrade at present.

A shares give voting rights, does this apply?

This is not applicable either.

(It’s there to prevent abuse of the first point (investor may not have >30% interest) - e.g. if the investor had a personal service company with a large stake in the EIS raising company but a small stake personally, he could circumvent the >30% rule even though he actually has beneficial ownership of the large stake through his other company.)

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Just to add to the above in regards to how the EIS yearly relief split works:

  • You are able to claim tax relief on the tax year of investment or the year prior. If your total Income Tax paid in 2017/2018 would have exceeded this year’s, you can claim the relief from the bigger pot.
  • One other point is that you can claim on a company by company basis. For example, if you invest 30k in 2 companies in 2018/2019 - 15k each. In that case, you would be able to take each individual investment and allocate to the relevant tax years, i.e., 15k in one and 15k in another. Hence you can claim up to 10k, utilising the entire 2-years’ relief (given that you paid those taxes in the first place and did not use the relief last year).
  • However, with EIS you are unable to split the tax relief over years for one company’s claim (if investing 30k in just one, you could not claim 5k from this year and 5k from last).

Hope it might be relevant to some members of the community so take into consideration.

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Don’t forget the CGT and IHT relief after holding for three years and two years, respectively.

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Ok advice required with the following example:

I owe £10,000 tax
Half way through the year I pay £5,000 tax through paye
Then I invest £30,000 and get £9,000 eis tax relief.
Do I lose the £4,000 eis tax (£9,000 - £5,000) or will I get retrospective relief for the year?

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Quick answer - claim it next April as you would have paid £10,000 by then, which will guarantee you maximise the relief.
You may have some luck phoning HMRC to confirm whether the relief takes tax paid to date into consideration or the entire yearly sum.
I would assume the former because HMRC do not know if you want to quit your job and go travelling 6 months through the year so that your tax was limited to £5,000 (vaguely). That way you would have got your £9,000 but only paid £5,000, which is illogical. These guys are dead prudent so most likely need to wait until you accumulate >£9,000 tax paid.

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I’m not sure you can split it over years. The best thing in this case is to consult a tax advisor. Other than that a very large investment might require extra compliance checks. Google for CrowdCube Investors Categories.

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I believe Stephen meant not splitting into two years but receiving the full annual relief on 90% tax paid in one year before he has paid that 90% in the first place.

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Yes you might be right. In that case you complete the form that comes with the EIS certificate, see https://help.crowdcube.com/hc/en-us/articles/206709830-How-do-I-claim-EIS-or-SEIS-on-my-investment-

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When it says tax relief can be claimed up to 5 years ahead, does this mean that you can claim the relief against future taxes earned say in 2019/20 tax year? Or is it only to claim relief against this tax year 2018/19 in which investment is made?

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You can claim the relief within 5 years but only for the year you invested in or the year before that.

Let’s have an example (assuming Income Tax rates and allowances remain the same). Last year (2017/2018) your net income was £55,000 (tax £10,360), this year it is £50,000 (tax £8,360), next year it will be £55,000 (tax £10,360) and the year after you have £60,000 (tax £12,360).

We will assume you invested £60,000 into Crowdcube startup this year (2018/2019) and made no investments last year and will not make any in the next two years.

Your options are:

  1. Claim £8,360 at the end of this year
  2. Claim £10,360 (max tax paid) from last year

Both of these you can exercise in the next 4 years but only the former in 5 years.

To answer your question, you could not claim the largest figure of £12,360 from your tax paid in 2021/2022 for the investment you made in 2018/2019 as the claim is only for

However, should you invest in multiple businesses within the same year, you may maximise your limits for each company separately as long as they are “per company per year”, i.e.,

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@Vlad one question as it happened with me and looking for some answers.

Before Freetrade I invested some amount in Sugru which has been sold for 90% loss before 3years.

I’m yet to claim my tax relief.

When I read about EIS I thought maximum loss is limited to 40% but I’m not sure anymore. Is maximum loss limited if not 40%, hmm is much is it?

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I will assume Sugru were EIS eligible, otherwise, the following will not apply.

Depending on when you subscribed to their shares, you can still claim your tax relief up to 5 years after the purchase, claiming the relief in the year you acquired it or the year before (but not both).

Because you sold your assets at a loss within 3 years, you are subject to income tax relief clawback. This means that instead of obtaining full 30% relief, you will only be eligible for part of it (but good news here, because you lost almost everything, the relief will be close to the maximum!).

Let’s say you spent £10,000 and your proceeds were £1,000. You lost £9,000 so your relief will be based on your loss rather than original value, hence it is £2,700 that you can claim.

This way your effective monetary loss is £9,000 (actual loss) - £2,700 (tax relief) = £6,300. That would be allowable for CGT and/or income tax relief. CGT relief will only be of usefulness to you if your annual capital gains exceed the allowance of £11,700 (e.g. you sell shares from non-ISA account for £18,000 and will pay no CGT at all given your relief). If it is not the case, then income tax relief is the only other option for you.

Income tax relief works quite basically. Whatever is your effective loss (£6,300 in our model), you multiply by your tax bracket percentage and that will be your additional relief. If you earn above £45,000, it would be 40%, if below - 20%. Therefore, you will be able to claim up to £2,520 (if 40%) or £1,260 (if 20%) on the top of the original £2,700.

Also bear in mind that your relief cannot exceed income tax you paid in a given year and hence will be capped at whatever tax figure you paid.

Whilst it is not a direct answer to your question, I hope it does help. If not, please reiterate the question as I was not sure what you referred to by saying “maximum loss”.

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@Vlad thank you, that made things clear to me.
I might have double counted what could be claimed.

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My pleasure. Feel free to ask if you have further questions.

P.S. Nice name, I approve!

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Very useful thread, thanks. I had been wondering about the process for claiming this, and found this link excellent in explaining how it’s dealt with from crowdcube.

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