As EIS investments are typically in early stage or start up businesses, the growth potential can be substantial. However, this also means that the investments are high risk and don’t always go to plan. To reduce the impact of a drop in value, investors may be able to claim loss relief.
Loss relief can allow investors to offset a loss in value against either their income tax bill or their capital gains tax bill.
What qualifies for loss relief?
An EIS investment must fall below its effective cost before it qualifies for loss relief.
The effective cost is the amount invested less the income tax reliefs claimed on the investment. For example, if you invested £10,000 in an EIS investment and claimed income tax relief of £3,000, then the effective cost of the investment is £7,000.
Claiming EIS loss relief against income tax
Investors can choose to offset a loss on an EIS investment against their income tax bill for the current or previous tax year.
To calculate the amount of relief available, multiply the value of the loss by the rate at which income tax is paid.
Claiming EIS loss relief against capital gains tax
Investors can choose to claim loss relief against capital gains arising in the current tax year or carry forward the loss and set it against any future gains.
To find out how much relief is available, multiply the loss in value by the rate at which capital gains tax is paid (20% and 10% or 28% and 18% for residential property disposals).
How to claim loss relief by using a self-assessment form
Investors who complete a self-assessment tax return can claim loss relief by completing the SA108 form. This could reduce the amount of tax they need to pay for the relevant tax year.
If they’ve already paid too much income tax, they can request that HMRC repay the excess by cheque or to their bank account via their self-assessment form.
Good to know
If an overall EIS portfolio has made a profit, loss relief can still be claimed against any individual company that has made a loss. However, it’s important for investors to remember that they can still lose money overall, even if they claim loss relief.