How Does EIS Work? Income Tax Relief, Loss Relief, and Claims

The Enterprise Investment Scheme, or EIS, works by giving you a 30% income tax reduction when you buy new shares in a qualifying smaller UK company, tax-free growth on those shares if you hold them at least three years, and loss relief if the company goes under. You can invest up to £1 million per tax year this way, or £2 million if the amount above £1 million goes into knowledge-intensive companies.1GOV.UK. Tax Relief for Investors Using Venture Capital Schemes The scheme has been extended to 6 April 2035, and several thresholds widened from 6 April 2026.2GOV.UK. Enterprise Investment Scheme and Venture Capital Trusts Scheme Extension

The 30% Income Tax Reduction

The headline benefit is straightforward. Put £100,000 into eligible shares and your income tax bill for the year drops by £30,000. The relief reduces your tax liability directly rather than your taxable income, so what you owe HMRC falls pound for pound at that 30% rate.

Two limits matter. The relief cannot take your tax bill below zero, so if you owe less income tax than the relief would generate, you lose the excess. And it is capped at the amount of income tax you actually owe for the year.

You can carry back all or part of an EIS investment to the previous tax year, which helps if your income was higher then or you have unused capacity in the earlier year. And the shares have to stay with you for at least three years from the date of issue. Sell before that and HMRC claws the relief back, in full or proportionately.3HM Revenue & Customs. HS297 Capital Gains Tax and Enterprise Investment Scheme

Tax-Free Gains and Deferral of Other Gains

If you hold the shares for the three-year minimum and you claimed income tax relief that was not later withdrawn, any gain when you eventually sell is completely free of Capital Gains Tax. A company that grows tenfold hands you the whole gain.3HM Revenue & Customs. HS297 Capital Gains Tax and Enterprise Investment Scheme

Separately, EIS lets you defer a capital gain you have already made on a completely different asset. Sell a buy-to-let at a profit, reinvest that gain into qualifying EIS shares, and the CGT liability is postponed. The reinvestment window runs from one year before the gain arose to three years after it. The deferred gain becomes chargeable again when you dispose of the EIS shares, though by then you may have other allowances to soak it up.4HM Revenue & Customs. Capital Gains Tax and Enterprise Investment Scheme (Self Assessment Helpsheet HS297)

Deferral relief has no annual investment cap, and you do not need to qualify for income tax relief to claim it. The deadline is five years after the first 31 January following the end of the tax year in which the EIS shares were issued.4HM Revenue & Customs. Capital Gains Tax and Enterprise Investment Scheme (Self Assessment Helpsheet HS297)

Loss Relief If the Company Fails

Early-stage companies fail often, and the scheme is built around that reality. If your shares become worthless or you sell at a loss, you can claim loss relief. The allowable loss is what you paid, minus any income tax relief you kept, minus whatever you got back on disposal.5HM Revenue & Customs. HS286 Negligible Value Claims and Income Tax Losses on Disposals of Shares

Say you invested £100,000, took £30,000 in income tax relief, and the company folded. Your allowable loss is £70,000. You can set that loss against capital gains, or against income for the year. Offsetting against income tends to be more valuable for higher-rate taxpayers because the effective relief rate is higher. Between the initial 30% and loss relief on the way down, the actual amount at risk on a total loss is a good deal smaller than the sum you originally wrote a cheque for.

Inheritance Tax After April 2026

EIS shares in unlisted companies have historically qualified for 100% Business Relief from Inheritance Tax after being held for two years, letting the full value pass to heirs free of IHT.6GOV.UK. Business Relief for Inheritance Tax – What Qualifies for Business Relief From 6 April 2026 the picture changed.

A new combined allowance of £2.5 million now applies across all assets qualifying for Business Relief and Agricultural Property Relief. Qualifying business assets inside the allowance still get 100% relief. Anything above it gets 50% relief, so an effective IHT rate of 20% on the excess. EIS shares listed on AIM are treated worse: 50% relief regardless of the allowance, meaning an effective 20% IHT charge from the first pound. The two-year holding requirement still applies, and you must hold the shares at death.

Which Companies Qualify

Not every small business can issue EIS-qualifying shares. Conditions have to be met at the time of the share issue, and several thresholds increased on 6 April 2026.

Some industries are shut out. The scheme is meant to push money toward genuinely productive, higher-risk ventures rather than asset-backed businesses with a natural floor under losses. Excluded activities include property development, banking and insurance, money-lending, legal and accountancy services, and dealing in land or financial instruments.13HM Revenue & Customs. Venture Capital Schemes Manual – Excluded Activities – Meaning of Excluded Activities A little excluded activity does not disqualify a company; the test is whether it makes up a substantial part of the trade.

Whether You Qualify as an Investor

You do not need to be a professional investor to use EIS, but you must keep a genuine arm’s-length relationship with the company. The key rule is that you cannot be “connected” to it. You must not hold more than 30% of the ordinary share capital or voting rights, counting shares held by your spouse, civil partner, and direct ancestors or descendants.14HM Revenue & Customs. Venture Capital Schemes Manual – EIS Income Tax Relief – The Investor – Connection – Subscribers

Being an employee disqualifies you. Directors sit in a different category: a director is only treated as connected if they receive payment beyond a list of “permitted payments.” Permitted payments include reimbursement of genuine business expenses, interest at a reasonable commercial rate on money lent to the company, dividends representing a normal return, and rent at market value. An unpaid director who receives only these can still claim full relief.15GOV.UK. Venture Capital Schemes Manual – EIS Income Tax Relief – The Investor – Connection – Directors Excluded That matters most to business angels taking a board seat: no salary, no management fees, and the directorship alone is fine.

How You Actually Claim

The company does the paperwork with HMRC first. Once shares have been issued and the qualifying business activity has been running for at least four months, the company submits form EIS1 (the compliance statement) to HMRC. If HMRC is satisfied, it issues a compliance certificate, form EIS3, along with a unique reference number, which the company passes to each investor.9GOV.UK. Apply to Use the Enterprise Investment Scheme to Raise Money for Your Company

You claim the relief through your Self Assessment tax return using that reference number, or by asking HMRC to adjust your PAYE code so the relief spreads across your salary during the year. The deadline to claim income tax relief is five years after the first 31 January following the end of the tax year in which the shares were issued. Miss that window and the relief is gone, so the EIS3 certificate is not something to file away and forget.

How Relief Can Be Withdrawn

The relief is not locked in until the three-year holding period ends and every condition has been met throughout. A few events pull it back.

  • Selling the shares within three years of issue. Partial sales trigger proportionate withdrawal.
  • Receiving value from the company during the period from one year before the share issue to three years after. That includes the company repaying loans you made to it, buying assets from you above market value, or giving you services at a discount.
  • Taking out a loan that would not have been made without the investment, or whose terms depend on it.
  • Any put or call option arrangement that guarantees you can sell at a set price, since that removes the genuine risk the scheme demands.
  • Becoming an employee, or crossing the 30% holding threshold.

If any of these happens, you have to notify HMRC within 60 days. Failing to report a disqualifying event, or supplying incorrect information, can bring penalties on top of the tax repayment.16HM Revenue & Customs. Venture Capital Schemes Manual – EIS Income Tax Relief – Company and Investor Procedures – Obligation to Notify HMRC of Disqualifying Events The withdrawal rules are strict because the scheme is designed around real risk: any arrangement that quietly guarantees your downside or pipes value back to you outside normal commercial terms will be unwound.