VCM10530 - Introduction to EIS income tax relief: form and amount of EIS relief
The relief takes the form of a reduction in the individual’s Income Tax liability. Except where it is restricted, as explained below, the amount of the reduction is equal to tax at the EIS rate, currently 30% (20% for shares issued before 6 April 2011) on the amount of the subscription (this excludes any costs incidental to the subscription) or, if that would exceed the liability for the year, whatever amount will reduce that liability to nil.
ITA07/Ss22 - 32
The relief reduces tax liability in accordance with the steps explained in Chapter 3 of Part 2 ITA07. First of all, total income chargeable to income tax is calculated. Then personal allowances and other reliefs (such as loss relief) are deducted. Income tax liability is then calculated by applying the appropriate income tax rates to the result. Finally EIS relief is used to reduce that tax liability.
To decide whether a reduction equal to tax at the EIS rate would eliminate the tax liability, it may be necessary to decide in which order reliefs taking the form of reductions in liability should be taken. ITA07/S27 provides that reliefs are to be deducted in the following order: first of all, VCT relief, then EIS relief, then SEIS relief, then various others as listed in S27.
The circumstances in which the amount of the reduction may be restricted are:
- where the individual has received value from the company (see VCM16030+), and
- where the aggregate amounts on which the individual has claimed relief exceed the limit for the year (see below).
In the first case the amount on which the reduction is calculated is the amount of the subscription less the amount of the value, and in the second case it is the amount of the limit for the year.
Limit on relief
There is a limit on the amount on which relief can be obtained for any year of assessment.
From 6 April 2018, the permitted maximum investment for a tax year (also known as allowable amount) is increased to £2m, but no more than £1m can be invested in a non-knowledge-intensive company for that tax year. This means an investor can invest up to £2 million in a tax year in a KI company, or a combination of KI company and non-KI company as long as the investment in a non-KI company is limited to a maximum of £ 1 million (see VCM8162)
An individual who would, but for this restriction, be able to claim relief on more than that amount cannot carry forward the excess. But it may be possible for the claimant to treat some or all of the shares as having been issued in the previous year, as explained below.
During 2021/22, an individual subscribes £800K EIS shares in a non-KI company and £600K EIS shares in a KI company. The individual can claim relief on the entire £1.4 million of shares as the shares subscribed in a non-KI company (£800K) is less than £1 million, and the combination of shares subscribed in the KI company and non-KI company (£1.4 million) is less than £2 million.
Furthermore, the general rule is that the relief is available for the tax year in which the shares are issued. But, if an individual choses, they can treat some or all of the shares as issued in the previous year and claim relief in that previous year, subject to the maximum limit for the year. So, if an individual subscribes for £2 million shares in a non-KI company, they can chose to treat £1 million as subscribed in the previous year. In case of an investment in a KI company or a combination of KI and non-KI company , up to £2 million can be treated as subscribed in the previous year as long as the investment in the non-KI is limited to £1 million, subject to the maximum limit for the previous year.
For details of how relief can be attributed to shares when this restriction applies see VCM14020.
Year for which relief is due, ITA07/S158
The relief is available for the year of assessment in which the shares are issued (the claimant can find the date of issue recorded on the company’s certificate on form EIS3 - see VCM14090). However, there are two situations in which shares may be treated as issued on some earlier date.
- In certain cases where the subscription is made through the medium of an approved investment fund (see VCM16050), the shares are treated as issued on the date when the fund closes
- The investor may claim to have some or all of the relief in the year preceding that in which the shares were issued. There is no limit on the amount which may be carried back, but the relief available in the earlier tax year will be subject to the overriding limit for relief for that year.
Mr Shah subscribes £950,000 for shares issued in 2019/20. He has already had relief on £700,000 in 2018/19. None of the companies he invested in were knowledge-intensive companies. The maximum relief available for year 2018/19 is £1,000,000, so he elects to carry back £300,000 to 2018/19. He uses the balance of £650,000 in 2019/20.
During 2021/22, an individual subscribes for £400K of non-KIC EIS shares and then during 2022/23 subscribes for £1.8 million of non-KIC EIS shares. The individual can treat £600K (£1 million maximum for non KIC for 2021/22 less £400K already invested in 2021/22) as subscribed in the previous year i.e. 2021/22. The amount treated as having been subscribed for qualifying shares in 2022/23 is £1 million (the maximum amount for 2022/23), therefore the individual will have to forego the excess of £200k (£1.8m - 600K-£1m) on which no relief could be claimed.
See VCM14150 for details of how to claim for an earlier year.