Can a director qualify for EIS relief?

This post is part of our Entrepreneurial team’s regular series of blogs.

This is a frequently asked question for the Entrepreneurial team. The short answer is “yes”, provided certain conditions are met.

  • If you are an unpaid director, then you will qualify.
  • If you are going to become a paid director, you can still qualify if you get the timing right…
    • You must subscribe for (and be issued) shares in the company before you become a paid director (and before you became entitled to any pay);
    • Those initial shares will then qualify for EIS and will also buy you a “grace period” of 3 years to make further EIS qualifying subscriptions.
    • After that 3 year grace period is up, you will no longer qualify.
    • Your pay must be “reasonable” i.e. not excessive for the role

Many exec and non-exec directors will meet these conditions and qualify for the key EIS tax reliefs (a deduction of 30% of the amount invested against their income tax and a CGT-free exit provided the shares are held for at least 3 years).

For those who don’t, it is worth noting that there is one other form of EIS tax relief available which can be claimed despite not meeting the above test and so not qualifying for those tax reliefs noted above – this is CGT deferral relief, a.k.a. reinvestment relief. This often-overlooked relief allows you to defer paying CGT on other gains you have made to the extent that you reinvest those proceeds into shares in an EIS qualifying company. The CGT that would otherwise be due is deferred until sale of those shares.

Of course, even if being a director does not prevent you qualifying for EIS, there are many other EIS conditions you could fall foul which could prevent you being able to claim income tax and CGT-free disposal reliefs. Ones to watch out for include: your children or spouse becoming an employee of the company or your shareholding, together with theirs, exceeding 30% during your 3-year holding period.