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The Enterprise Investment Scheme (EIS) presents an investor with some powerful opportunities to generate returns in a tax-efficient manner. Inevitably, sometimes these companies fail and so result in a loss. Fortunately, one of the compelling reasons to consider EIS is found in its “loss relief” mechanism – mitigating excessive damage to a portfolio in the event.
In this article, our investment team here at Bure Valley Group demonstrates how EIS loss relief is calculated. Furthermore, we offer some answers to some commonly asked questions about EIS which shed further light on the topic. We hope you find this content helpful. Find out more about our EIS and other investment opportunities by visiting our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
+44 160 334 0827
How EIS loss relief works
In summary, EIS loss relief enables an investor to offset their loss on a failed EIS investment against his/her income tax bill or capital gains tax (CGT) bill. To access loss relief, you need to demonstrate to HMRC that the value of your EIS investment – at the time of sale – has fallen beneath its “effective cost”. This refers to the sum you originally invested, subtracting whatever amount you claimed in income tax relief beforehand.
How EIS loss relief is calculated
A practical example might help to illustrate. Suppose you identified an investment qualifying for EIS and invested £30,000. Furthermore, at the time you also claimed income tax relief upfront – i.e. £9,000, which represents 30% of your investment. As such, the “effective cost” of your EIS investment was £21,000.
To illustrate how loss relief works, imagine this EIS investment sadly failed (due to the company going bust). You can claim loss relief equivalent to the highest rate of income tax that you pay. So, if you are an additional rate taxpayer, then you could claim back 45% of the aforementioned £21,000 – i.e. £9,450. In the event, this means that your loss would be £11,550 instead of the full £30,000 you originally committed.
Can I claim against CGT?
The above example supposes that an investor claims loss relief against their income tax bill. Yet there might be circumstances where it is more appropriate for the investor to offset their loss against their CGT bill.
When can you claim loss relief?
Under current rules in 2020-21, an investor can claim EIS loss relief on the year of the loss itself and then offset it against their tax bill in the present year – or in the year prior. You can act as if the EIS shares were issued in the prior financial year provided you had not already reached the annual value limit for buying EIS shares (i.e. £1,000,000).
How should EIS loss relief affect investor decisions?
Whilst EIS loss relief is a welcome buffer against investment loss, investors should still bear in mind that they can lose money – in the main – if your EIS investment fails. The mechanism is designed to cushion your portfolio rather than eradicate any impact whatsoever. As such, it’s important to treat EIS as a long-term investment and to seek professional advice about how EIS investments might feature in your portfolio.
Remember that smaller companies (such as those qualifying for EIS) might fluctuate in value more dramatically than publicly-listed companies, and so you should carefully consider your attitude towards the balance of investment risk and return. Always due your due diligence on any EIS company you are thinking about committing capital to. For many investors, it will also help to draw upon the resources, expertise and vetting provided by an investment introducer platform/network – such as ours offered here at Bure Valley Group.
If I am invested in an EIS fund how does loss relief work?
Those looking to invest in EIS can either invest directly into individual EIS-qualifying companies or by investing in an EIS fund (i.e. a portfolio of EIS companies, by pooling together your money with that of other investors). For the latter, this presents the possibility of individual companies within the fund falling/failing – even as the overall fund performance rises.
Here, it’s important to note that EIS loss relief is not applied to funds but rather to individual companies. As such, if any distinct holdings within your EIS fund are sold at an effective loss, it might be possible for you to claim EIS loss relief on this individual company – even if your EIS fund rises in value overall.
What’s the best way to claim EIS loss relief?
EIS investments tend to feature in the portfolios of higher-earning investors or sophisticated investors. Such individuals will, therefore, be at least somewhat familiar with self-assessment tax returns – and this is where you can claim your EIS loss relief, via the SA108 form. This can be downloaded from the HMRC website, or you can request one to be sent to you via post.
Conclusion & invitation
Interested in finding out more? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827