EIS loss relief

What is EIS loss relief?

EIS loss relief is one of several tax benefits offered to investors through the UK’s Enterprise Investment Scheme (EIS), which is designed to help high-risk, early-stage businesses attract venture capital funding.

Other EIS incentives - such as income tax relief, inheritance tax relief and capital gains tax (CGT) deferral relief – may initially be more appealing to investors. However, loss relief provides a certain level of financial protection if the company underperforms or fails.

While investors may still lose money on their overall EIS investment, claiming loss relief at least reduces the deficit.

When can investors claim EIS loss relief?

If investors sell their EIS shares for less than they paid for them or the value of their investment falls to zero (for instance, if the EIS-qualifying company fails), they may be eligible for loss relief.

EIS loss relief scenarios

Loss relief comes into the picture in several different scenarios – including when a company is sold, shut down or turned into a ‘zombie’. Zombie companies generate just enough revenue to function and pay overheads, but have no spare cash to repay loans or invest in growth.

How is loss relief calculated?

The process of calculating and claiming loss relief depends on whether an investor is able to sell their shares and how much EIS income tax relief they initially received. To qualify for EIS loss relief, the value of an investment must fall below what’s known as the ‘effective cost’ (the amount invested minus income tax relief). The ‘effective loss’ of an investment is the amount for which relief is available.

For instance, if an investor buys £100,000 of EIS shares and receives 30% income tax relief (£30,000), the effective cost of this investment is £70,000. 

• If they sell their shares for £60,000, the effective loss available for relief is £10,000 (providing that none of the initial tax relief is withdrawn by HMRC)

• However, if the value of the investment falls to zero, the investor could claim relief on a maximum effective loss of £70,000 (since there was no gain from the shares)

An investor can choose to set the loss against their income tax bill or CGT liability. The value of their loss relief is calculated by multiplying the effective loss by their marginal rate of income tax or CGT.

Claiming loss relief against income tax

One way to claim EIS loss relief is via an income tax deduction. If an investor chooses this approach, they must make a claim within one year (starting from the 31 January following the loss). For instance, if they sold their EIS shares in the 2023/24 tax year, the loss relief deadline would be 31 January 2026.

To receive loss relief in the current tax year, investors need to ask HMRC to adjust their PAYE tax code. Alternatively, they can amend their own self-assessment tax payments. It’s also possible to claim against the previous tax year by submitting a capital gains summary ( SA108) to HMRC.

Claiming loss relief against capital gains tax

Investors also have the option to set a loss from EIS shares against their CGT bill. This must be done within four years (following the end of the tax year in which the loss occurred). 

Loss relief can be applied to the current tax year or future years. In either case, the loss amount is deducted from their chargeable gains before CGT. 

For further information and guidance on EIS tax and loss relief, visit gov.uk.

EIS loss relief example

Joe Bloggs invests £500,000 in an EIS-qualifying company, which allows him to claim 30% income tax relief (£150,000). The effective cost of this investment is £350,000.

After four years, the company fails and Joe is left with shares of negligible value. The amount of loss relief he can claim depends on whether he sets the effective loss (£350,000) against his income tax or CGT bill. The table below shows how the loss relief value would vary for different tax rates: