Who can invest under EIS: eligibility and the connection rules

EIS eligibility has two halves. The company has to qualify, which is covered in EIS qualifying companies. You have to qualify too, and that is a shorter list, but the conditions are strict and several of them apply for years after you invest.

This guide is one part of a set covering the whole scheme. The EIS hub lists every guide, from eligibility to claiming.

The basic tests

• You must be an individual. Companies, partnerships and trusts cannot claim EIS income tax relief, although trustees can in limited circumstances claim capital gains deferral.
• You need a UK income tax liability. Relief reduces tax you owe; it is not a cash payment. Non-residents can claim only against a UK liability.
• You must subscribe for new shares in cash, and they must be fully paid at issue. Buying shares from an existing shareholder never qualifies.
• The shares must be full-risk ordinary shares with no preferential right to dividends or to assets on a winding up, and no redemption rights.

The connection rules

You are connected with the company, and lose income tax relief, if you hold too much of it or work for it. HMRC looks at your holdings together with those of your associates, which includes spouses or civil partners, parents, grandparents, children, grandchildren and business partners, but not siblings.

The window runs from two years before the share issue to the end of the three-year qualifying period. Becoming connected at any point in it withdraws the relief.

The business angel exception

There is a narrow exception for a director who is unconnected at the time of the share issue and only later becomes a paid director. This is how business angels take a board seat without losing relief. It is easy to get wrong, and worth taking advice on before accepting any payment.

Receiving value

Relief is also withdrawn if you receive value from the company during the period: a loan, a repayment of a debt that existed before the shares were issued, an asset sold to you below market value, or any benefit that is not on arm's-length commercial terms. Ordinary dividends on the shares and payments for genuine services at a commercial rate are not caught.

The SEIS connection rules are similar but the employment test is tighter; see who can invest in SEIS.