Do not invest unless you are prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.
The Enterprise Investment Scheme (EIS) offers investors an additional relief that sets it apart from many other investment strategies. Loss relief provides a crucial mechanism that can significantly reduce the potential downside of investing in early-stage, innovative companies.
What Exactly is EIS Loss Relief?
Loss relief is a unique tax benefit that allows investors to offset losses from EIS investments against their income tax or capital gains tax. This mechanism helps to mitigate the inherent risks of investing in early-stage and potentially volatile companies.
How Loss Relief Works in Practice
When an EIS-qualifying company fails or the investment loses value, investors can claim relief in two primary ways. You can choose to offset the loss against your income tax in the tax year of the loss or the preceding tax year, or you can set it against capital gains tax in current or future tax years.
For income taxpayers, this means you can effectively recover a significant portion of your lost investment through tax relief. If you’ve invested £10,000 in an EIS-qualifying company that ultimately fails, you could potentially reclaim up to £3,150 via loss relief, in addition to your initial £3,000 income tax relief, depending on your tax rate.
Calculating Loss Relief
The actual relief is calculated based on your investment amount, the initial income tax relief claimed and your marginal tax rate. Your net loss is calculated as the investment amount less any initial income tax relief claimed. For a basic rate taxpayer, you can then claim relief at 20% of the net loss. Higher and additional rate taxpayers can claim relief at 40% or 45% respectively.
Take an example in which you invest £10,000 in an EIS company that becomes worthless, and you have claimed £3,000 initial income tax relief (30% of your investment amount). If you’re a 45% tax rate payer, you could potentially offset up to 45% of the net loss of £7,000 – so £3,150 against your income tax liability in the tax year of the loss or the preceding tax year. This means that, although the investment had a zero return, your total loss is only 38.5%.
Strategic Considerations
Loss relief mitigates the high risk nature of EIS investments. It provides investors with an element of downside protection. This helps cement EIS an attractive option for sophisticated investors willing to support innovative, early-stage companies.
Claiming Process
Most investors claim loss relief through their annual self-assessment tax return. You’ll need documentation from the company confirming the loss, including details of your original investment and the circumstances of the investment’s failure.
Important Limitations
While powerful, loss relief is not a complete safety net. You can only claim relief against tax you’ve paid, and the relief is calculated based on your marginal tax rate. It’s not a direct cash refund but a reduction in your tax liability.
Consultation Recommendation
Given the complexity of tax relief calculations, it’s highly recommended to consult with a tax professional who can provide personalized advice tailored to your specific financial circumstances.
Parkwalk Advisors Limited (Parkwalk) is authorised and regulated by the Financial Conduct Authority: FRN 502237. Investments referred to in this news article are not suitable for all investors. Capital is at risk and investors may not get back the full amount invested. Any investment in a Parkwalk product must only be made on the basis of the terms of the full Information Memorandum. Tax treatment depends on the individual circumstances of each investor. Parkwalk is not able to provide advice as to the suitability of investing in any product. Past performance is not a reliable indicator of future results. This financial promotion was approved in February 2025.
