VCM25150 - EIS: income tax relief: connection with the company: equity holders

As noted in VCM25100, where the 30% test is operated by reference to the rights of an individual in circumstances such as a winding-up, the legislation uses the special concept of equity holders and a special method of computing the percentage entitlement. These are taken from ICTA/SCH18, which is concerned with group relief; accordingly ICTA/S291B and ITA/S170 have to adapt Schedule 18 by substituting references to equity holders for references to the parent company where appropriate. Guidance on Schedule 18 will be found at CTM81000 onwards.

The main consequence of applying Schedule 18 for the purpose of measuring an individual's entitlement to receive assets is that all rights in respect of `normal commercial loans' are excluded from consideration. (Note that most interest-free loans will count as normal commercial loans.) The reason for excluding such loans is that otherwise, under this test, a shareholder who had also lent money to the company could become connected with it simply because it had not prospered and its assets had shrunk to the point where it had enough only to cover the rights of loan creditors, with little or nothing left for the shareholders.