Once you’ve invested in a startup that is EIS eligible, you can receive income tax relief, however, not many people know what to consider when claiming EIS Tax Relief in practice.
This article explains the seven things you need to consider before claiming your EIS Tax Relief.
Things to Consider Before Claiming Tax Relief For EIS
1. When you won’t get tax relief on your investments
You can’t claim income tax relief if you and your associates are connected to the company.
This is true if you or your associates are:
- Employed by the company or any of its subsidiaries (except as a director in some cases)
- Holds a total of more than 30% of the company’s:
- Loan capital for SITR
- Rights to vote
- Rights to its assets if the company is wound up
Your associates are as follows:
- Great-grandparents, grandparents, and parents
- Great-grandchildren, grandchildren, and children
- Spouses and civil partners
- Business partners
- Trustees of settlements in where you’re either the settlor or the beneficiary
- For SITR investments, you can’t be a partner or trustee of the social enterprise.
These conditions apply for two years before the investment and a minimum qualifying period of at least three years.
For tax relief for directors connected to the company
If you’re a paid director of the company when the shares are issued, you can’t claim tax relief unless your payment is a ‘permitted payment.’
A permitted payment is:
- Reimbursement of work-related expenses
- Fair interest rates on loans to the company
- The dividend which doesn’t exceed a regular return on the amount invested
- Payment for supplying goods at market value
- A reasonable commercial rent payment
- Other than secretarial, administrative, or similar services to the company, fair payment for services done within your trade or profession must be included in your accounts for tax purposes.
If you meet the following criteria at the time the shares are issued,
You may claim tax relief if, at the time the shares are issued, you meet the following criteria:
- An unpaid director of the company (and aren’t entitled to any payment)
- Not previously involved in the same trade in which the company is seeking funding for
You can keep any income tax relief you’ve previously acquired if you become a paid director.
And you can also claim tax relief after becoming a paid director if you were:
- Issued shares before you became a paid director, and any new shares are issued within three years of the original share issue or the date the company began trading.
- When you were a paid director of the company, you were issued with SEIS shares, and the new EIS share issue is within three years of the SEIS share issue.
2. Shares that qualify for EIS tax relief
Your shares should be newly issued and paid for in full (in cash) to be eligible for Income Tax relief. Only if the company has a way to accept payment before shares are issued you’ll get relief. You must also purchase full-risk ordinary shares, which are non-redeemable and carry no special rights to a company’s assets if it closes down.
You can have limited preferential rights to dividends on the shares you issue. However, the right to receive dividends can’t be allowed to accrue or vary the dividend.
There can’t be an arrangement when the shares are issued:
- to protect your investment
- to structure the company’s activities in such a way that you gain or benefit in a way that’s not intended by the scheme
- to sell the shares at the end of or during the relevant period
- for a reciprocal agreement in which the company’s owner invests in your company to also gain tax relief
You won’t be able to claim Income tax relief if you received new shares and already hold other shares in the company that isn’t either of the two shares:
- issued to you when the company was formed
- which you’ve received a compliance certificate for (form EIS3)
3. Loans that qualify for EIS tax relief
Convertible loans are used by many startups and developing companies at the early stages of their investment.
However, it doesn’t qualify for EIS relief.
The shares must be issued to raise business activity funds to qualify for EIS relief. Because the conversion of loan stock to equity is not considered to raise money for the company, it doesn’t qualify for EIS relief.
4. Selling your investment and getting EIS tax relief
To collect the full tax reliefs available, you must keep your entire investment in an EIS-eligible company for at least three years.
- You sell some or all your shares.
- The company doesn’t meet the conditions for the scheme
- You establish a connection with the company.
- You obtain money or other assets from the company or unusually high interest on a loan from the
Also, you’ll lose tax relief if the company pays back the money invested in shares to investors who didn’t receive tax relief. This applies for twelve months before the share issue.
5. Consult a financial adviser
Investors must consult a financial adviser to help them find an EIS investment that fits their investment goals and financial limitations.
Also, a financial adviser will assist you with the claim if necessary.
For example, the EIS 3 Certificate is needed before a claim for any of the EIS tax reliefs can be made. You can complete the claim form you receive (found on pages 3 and 4 of the EIS3) and send it to your HMRC tax office.
With this, a financial adviser may be able to assist you in claiming your tax relief or if you have any other questions.
6. Choose the right investment manager.
Suppose you’re considering investing in a portfolio of EIS-qualifying companies chosen by an investment manager.
In that case, you should look at your EIS manager’s experience in selecting and investing in smaller companies. Choosing an EIS manager with a track record of providing plausible exit opportunities may be worthwhile.
However, note that past performance isn’t a guarantee of future returns.
7. Check the fees
You should check the fees of the EIS portfolio service you’re interested in and compare them with what other EIS managers charge.
All fees should be mentioned, including when they are due and who is responsible for them.
It should also be clear how long fees are due and under what conditions they might be changed.
Now that you know what you should consider before claiming your EIS tax relief, you may read this article to help you file your EIS tax relief.
Rest assured that we’ll help you in your investment journey.