Why the EIS Tax Relief Scheme Is a Magnet for Startup Investment

For those running or planning to launch a startup, every bit of assistance you muster up is one more step towards the ultimate goal: success.

Of the many things that make the United Kingdom such a great choice for potential startups and for those looking to invest in them are the abundance of governmental assistance programs available.

One of those programs is the EIS Tax Relief scheme.

This article intends to explain in short what the EIS Tax Relief scheme is and how it helps British startups, especially regarding attracting investors.

What Is the EIS Tax Relief Scheme?

Created by the United Kingdom, the EIS scheme tax relief encourages investors to fund early-stage businesses and startups.

EIS benefits investors by offering them a potentially significant financial assistance in the form of capital gains and income tax by investing in EIS eligible startups.

EIS helps businesses by making them a much less risky investment opportunity and thus more attractive to investors.

How EIS Tax Relief Benefits Investors

There are several benefits for those interested in investing in EIS eligible startups. These benefits are also great selling points for EIS eligible startups looking to attract investors as well.

EIS Capital Gains Tax Relief

  • Deferral Relief: Investors will not have to pay Capital Gains Taxes until a later date if the investor disposes of any assets and uses the gain made on that asset to invest in a company qualifying for EIS. The investor will only have to pay the Capital Gains Tax when they dispose of their EIS company shares.
  • Disposal Relief: All gains accrued by an investor who holds shares in an EIS company for three years or more may be exempt from Capital Gains Taxes when they decide to sell them. For example, if the investor buys £10,000 in shares, and those shares increase to £30,000, the will not be taxed if the shares are three years or older. However, one should take note that this is only an example. Startup equities are high-risk assets, which means investment values could decrease over time.

EIS Income Tax Relief

Investors have the opportunity to claim up to 30 per cent of the value of their investment. This decrease comes in the form of income tax relief.

Therefore, if one were to invest £10,000, they can save £3,000 in income tax.

Carry-Back: Applying Tax Relief to a Previous Year

As long as the EIS shares purchased haven’t gone over £1,000,000 within that year, investors can treat some or all of their shares as if they were issued the year before.

For example, if one were to invest £10,000 in an EIS eligible startup within the  2019-2020 tax year, their income tax relief would be £3,000.

Investors can apply to have that £3,000 “carried back” to the previous 2018-2019 tax year, as well as relieved against their taxes in 2019.

However, they cannot have acquired more than £1,000,000 of shares within that year.

EIS Tax Relief Rules for Investors

  • Investors can only invest a maximum of £1 million EIS qualifying startups within each tax year
  • Investors must hold the shares they purchase for at least three years
  • If an investor sells or gifts their shares within before the three-year period, those shares will be subject to “relief clawback”
  • Investors cannot “carry-forward” their EIS tax relief
  • The investor must be United Kingdom taxpayers
  • Investors cannot be connected in any way to the EIS company
  • Investors must purchase brand new shares that have never been on the market.