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  • EIS Qualifying Investor – Relief Eligibility & Opportunities

    2 March 2020

    EIS Qualifying Investor – Opportunities, Tax Relief, Loss Relief & Income Tax

    EIS Qualifying Investor – Eligibility Overview

    The investor must also meet certain requirements for his or her investment to qualify for relief.

    The requirements are to be an EIS qualifying investor are:

    • The investor must be an individual
    • The investor must not be connected with the Company (though not relevant for deferral relief) in Period A
    • No ‘linked loans’ in Period A
    • The investment is a genuine commercial one ( and not part of tax avoidance scheme)

    Must be an Individual

    As stated above, the individual making the investment must be an individual and must be making the subscription on his or her own behalf.

    As such, relief cannot be claimed by an individual subscribing in the capacity of a nominee or a trustee.

    That said, the nominee themselves (or beneficiary of the bare trust) can claim relief on the investment. The position is the same for joint investors.

    Not connected with the Company


    Further, the investors must not be connected with the investee company in Period A

    What is period A?

    Period Begins Ends Termination date
    A Incorporation of the Co; (or if Co incorporated more than 2 years before the date of issue of shares, 2 years before that date) Immediately before the termination date relating to the shares Usually 3 year anniversary of issue…

    But, If not begun to carry on trade on issue date; then 3rd anniversary of date on which begun the trade

    OK, so now we know what Period A is. When is an individual connected with the investee company?

    Practically, we will most often be concerned with two scenarios:

    • Where the individual is remuneration as an employee – note that where the individual is a director then the position is more nuanced (see below); and
    • Where the person holds or is entitled to acquire more than 30% of the investee company (there are various tests – see below).

    Directors – Unpaid & Paid

    If a director does not receive any payment in ‘Period A’ then the ‘employment connection’ is not triggered.

    It is important to bear in mind that normal expenses and dividends will not constitute ‘pay’ for these purposes. However, it is still possible to remain unconnected as a director where pay is received. The investor may still qualify as long as any remuneration received AFTER the issue of the shares. This type of director is often referred to as a ‘Business Angel.’

    The director must also pass another test and that is that one of the following also applies:

    1. at the issue of the shares, the director has never before been connected with the company in any way;
    2. the issue of shares is made before the termination dateof a previous issue of eligible shares in respect of which the director satisfied the condition just mentioned; or
    3. the issue is made before the termination date of a previous issue of shares in respect of which the director was eligible for SEIS relief


    In September 2016 Jay, a retired accountant, subscribes for shares (Issue 1) in Kasbah Leisure Limited. He had no previous connection with the Company.

    He later became a director and was paid for this work. He will get relief in respect of the September 2016 investment.

    In April 2017 he makes a further investment (Issue 2). He will also get relief on this as the issue of shares is made before the termination date of a previous issue and he was not previously connected with the company on Issue 1

    In December 2019 he makes further investments in the company. However, he will not get relief on this as we are outside the termination date on Issue 1 and he was connected with the company on Issue 2 (so none of the three conditions apply).

    30% Shareholding / Entitled Test

    One of the most common fetters on an investor getting income tax relief is that the investor cannot hold (or be entitled to acquire) more than 30% of the Company’s:

    • Ordinary share capital (“OSC”);
    • Issued share capital;
    • Voting rights (“VRs”)
    • Rights to assets on WUP

    For the purpose of this test then one must aggregate an individual and his associate’s rights. For example, this will include rights held be a spouse, parents, children.

    Voting power and other entitlements are ascertained in the first place by reference to the company’s Memorandum or Articles of Association – can be overridden by any agreement made between the shareholders.

    No linked loans

    Tax relief may also be prejudiced in a scenario where a linked loan is made to an investor.

    These rules will apply are where a loan would not have been made (or would not have been made on the same terms) if the investor had not made the investment in the EIS shares.

    HMRC’s primary concern will be with the reason why the lender made the loan rather than why the borrower applied for it. The rules do not necessarily have effect to deny or withdraw relief just because a loan is used to finance the acquisition. Moreover, if the lender learns that the purpose, or one of the purposes, of the loan application is the financing of the acquisition, that does not necessarily mean that the rules have effect to deny or withdraw relief.

    The test is whether the lender makes the loan on terms which are influenced by the fact that the borrower, or an associate of the borrower, has acquired, or is proposing to acquire, the shares.

    The rules would not have effect to deny or withdraw relief where a person proposing to acquire shares receives a loan from a bank, if the bank would have made a loan on the same terms to a similar borrower who was intending to use it for a different purpose.

    But if, for example, a loan is made on a specified security which consists of, or includes, the shares in question, it would be one which would not otherwise have been made on the same terms.

    In such a case, the loan would be linked with the shares, and the investor would not qualify for relief in respect of them. This would apply only where the shares, or any rights associated with them, are specified as all or part of the security. It would not apply, for example, in any case where the lender had recourse against the borrower’s assets generally.

    Investment is a Genuine Commercial One

    Finally, the investment must be made for genuine commercial reasons and not as part of a tax avoidance scheme.

    This rules out any subscription which is driven by considerations of benevolence or charity.

    For example if a fan introduces £1m (at a significant premium) to a cash-strapped local non-league football club then it is likely that this test might be in question. Similarly, this would also be questionable where a company is owned by a person the investor wishes to benefit (such as a friend) and the aim is to increase the value of the other person’s shares

    In addition, HMRC’s Manuals also state that deathbed investments are unlikely to be made for genuine commercial reasons.

    If you have any queries about whether you are an EIS qualifying investor or EIS in  general  whether as a potential investee company or investor, then please do get in touch.


    Albeit, we can’t give you investment advice as we are not regulated by the Financial Conduct Authority – so please get that type of advice from someone who is!


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