1.3 Connection with the company
You are not eligible for income tax relief on the cost of your shares if you are connected with the company. You can be connected in two ways.
1.3.1 Connection by financial interest in the company
A financial interest in the company, or in any subsidiary of the company, can make you connected with it. If you control the company, or hold more than 30 per cent of the share capital (or share and loan capital taken together) or voting rights, you are connected with the company. If you are entitled to more than 30 per cent of the assets in the event of a winding up you are also connected; note that in looking at entitlement to assets, loans to the company are taken into account.
These conditions apply throughout the period beginning two years before the issue of the shares and ending three years after the issue (or three years after the commencement of the trade if that followed the share issue). So if you take a 15 per cent stake and are given income tax relief, and a year later you take an additional 20 per cent stake, you have become connected, and the relief will be withdrawn.
Shareholdings/voting rights/rights to assets in a winding up held by your associates are also taken into account. Associates are defined as business partners, trustees of any settlement where you are a settlor or beneficiary, and relatives. Relatives are spouses or civil partners, parents and grandparents, and children and grandchildren; brothers and sisters are not counted as associates for the purpose of the EIS.
1.3.2 Connection by employment
If you are a partner, director (though see 'Business Angels' below) or an employee of the company, you are connected with it. You are also not eligible for relief if an associate (see above) is so connected. As with connection because of an interest in the company, this restriction applies not only at the time the shares were issued but to the two year period before the shares were issued and the three years after the issue (or the three years after the commencement of the trade if that followed the share issue).
1.3.3 Business Angels
However there is an exception for directors who are 'Business Angels'. Where your only connection with the company is as a director who receives no remuneration (and is not entitled to such remuneration), and you had not previously been involved in carrying on the trade the company is carrying on, an investment may qualify for income tax relief.
That relief is not withdrawn if you subsequently become a paid director, providing the remuneration is reasonable. You can also claim income tax relief on investments made after becoming a paid director, providing those shares are issued during the period as covered at 1.2.1 above relating to the shares issued before you became a paid director.
1.3.4 Summary of tax reliefs
Item |
Unconnected |
Connected |
|---|---|---|
Income tax Relief on subscriptions |
Yes |
No |
Capital Gains Exemption on disposal of shares eligible for income tax relief |
Yes |
No |
Loss Relief on disposal of shares disposed of at a loss |
Yes |
Yes |
Capital Gains Deferral (unlimited) |
Yes |
Yes |
