Every serious conversation about EIS investment eventually arrives at the same question: what happens when a company fails? Early-stage companies fail often. Anyone who tells you otherwise is not being straight with you.
EIS loss relief is the government's answer. It is the least glamorous of the EIS tax reliefs — nobody invests hoping to use it — but it is the one that defines the true risk profile of an EIS portfolio. Understood properly, it means the maximum an additional-rate taxpayer can lose on a failed EIS investment is 38.5p in the pound. Understood badly, investors either overestimate their protection or fail to claim what they are owed.
This guide explains exactly how EIS loss relief works: the mechanics, the maths at each tax rate, how and when to claim, and the traps that catch investors out.
EIS loss relief at a glance — 2026
| What it is | Relief on the net loss when EIS shares are disposed of at a loss |
|---|---|
| Net loss | Amount invested minus EIS income tax relief already received |
| Offset against | Income tax (at your marginal rate) or capital gains tax |
| Maximum effective loss (45% taxpayer) | 38.5% of amount invested |
| Maximum effective loss (40% taxpayer) | 42% of amount invested |
| Claim route | Self Assessment — year of loss or carried back one year (against income) |
| Company not yet wound up? | Negligible value claim available |
How EIS loss relief works
When you invest in an EIS-qualifying company, you receive 30% income tax relief upfront. If the company later fails or you dispose of the shares at a loss, loss relief applies to your net loss — what you actually put at risk after the upfront relief.
Invest £50,000. Receive £15,000 income tax relief. Your net cost is £35,000. If the company fails completely, £35,000 is your allowable loss — and you can set that loss against your income tax bill at your marginal rate, or against capital gains.
This is the critical distinction from ordinary share investing. A normal share loss can generally only be set against capital gains. EIS losses can be set against income — where the tax rates are higher and most investors have far more liability to offset.
The maths at each tax rate
The worked examples below assume a £100,000 EIS investment and total company failure — the worst case.
Additional-rate taxpayer (45%)
- Investment: £100,000
- EIS income tax relief received: £30,000
- Net loss: £70,000
- Loss relief against income at 45%: £31,500
- Total tax recovered: £61,500. Maximum effective loss: £38,500 — 38.5p in the pound.
Higher-rate taxpayer (40%)
- Investment: £100,000
- EIS income tax relief received: £30,000
- Net loss: £70,000
- Loss relief against income at 40%: £28,000
- Total tax recovered: £58,000. Maximum effective loss: £42,000 — 42p in the pound.
Offsetting against capital gains instead
If you have insufficient income tax liability — or prefer to use the loss against gains — the same £70,000 net loss offset against capital gains taxed at 24% recovers £16,800. Total recovery: £46,800; effective loss 53.2p in the pound. Setting the loss against income is almost always more valuable when the liability exists.
Partial loss
Loss relief is not all-or-nothing. Suppose the £100,000 investment exits at £40,000. Allowable loss: £100,000 minus £30,000 relief minus £40,000 proceeds = £30,000. That £30,000 offsets income at your marginal rate in the same way.
How to claim EIS loss relief
The claim is made through Self Assessment. You can set the loss against income in the tax year the loss arises, the previous tax year, or split between the two — whichever produces the better result given your income in each year.
Two routes trigger the claim:
Disposal. You sell or dispose of the shares at a loss — including a formal liquidation where shareholders receive little or nothing.
Negligible value claim. Many failed companies are never formally wound up — they simply stop trading and sit dormant. You do not have to wait. If the shares have become worth next to nothing, you can make a negligible value claim to HMRC, which treats the shares as disposed of at their negligible value on the date of the claim. This crystallises the loss and lets you claim relief without waiting years for a liquidator.
Conditions worth knowing: the shares must have been subscribed for (not bought second-hand), the loss must be genuine — calculated after deducting the income tax relief you kept — and if HMRC has clawed back your original EIS relief for a qualifying breach, the loss relief calculation changes accordingly. Keep your EIS3 certificates; you will need the paper trail.
What loss relief does — and does not — do for a portfolio
Loss relief transforms the arithmetic of a diversified EIS portfolio. Because failures return up to 61.5% of capital via tax relief while successes are entirely CGT-free after three years, the asymmetry works in the investor's favour: capped, cushioned downside against uncapped, untaxed upside.
What it does not do is make EIS investing safe. A 38.5% loss is a real loss. Loss relief depends on having sufficient tax liability to absorb it, and it compensates in tax recovered, not in cash returned when you want it. It is downside mitigation, not downside protection.
SEIS loss relief — briefly
The same mechanism applies to SEIS with better numbers: 50% upfront relief means the net loss is only half the investment. For a 45% taxpayer, a total SEIS failure costs a maximum of 27.5p in the pound. Our What is SEIS? guide covers the full SEIS relief package.