Angels and demons and the perils of getting the EIS ‘directors’ rules’ wrong
27th February 2026
Posted in Articles by Andrew Marr
The Enterprise Investment Scheme (‘EIS’) offers various tax incentives to individuals who invest in start-up companies, including a 30% income tax relief and full exemption from capital gains tax after holding the shares for three years.
With such generous reliefs on offer, it is no surprise that there are stringent qualifying conditions to be met. Where the individual is to become a director of the company, it is very important that the rules are followed carefully to avoid a nasty surprise.
The rules regarding directors
Under the Income Tax Act 2007 (ITA 2007), an investor cannot qualify for EIS income tax relief or disposal relief if they are “connected” with the issuing company (whether before or after the incorporation) at any time during the period:
(a) beginning two years before the issue of the shares, and
(b) generally ending three years after the issue of shares.
There are various ways in which an investor can be connected, which can include being a director of the company.
Helpfully, directors are only classed as being connected if they receive a payment from the company other than certain “permitted payments”. This rule is extended to cover indirect payments made to the individual’s order or for their benefit or paid by related persons.
Permitted payments
The list of permitted payments is set out in statute, and covers things like reimbursement of normal business expenses, paying commercial rates of interest on loans, commercial rent for use of property etc. It also includes “any reasonable and necessary remuneration” which is:
(a) paid for services rendered in the course of a trade or profession, other than secretarial or managerial services; and
(b) taken into account in calculating for tax purposes the profits of that trade or profession.
It could be thought that this means receiving reasonable remuneration as a director is acceptable. However, the words “other than secretarial or managerial services” narrow the scope significantly and should not be overlooked. Since acting as a director is likely to be viewed as “managerial” in nature, any remuneration paid for directors services only is unlikely to qualify.
Business angels let-out
All may not be lost in this scenario, however. In order not to discourage investors who want to become directors, the legislation contains a further “business angels” let-out. This allows for the fact that investors may have expertise that the company could benefit from and so should not be punished by being barred from the reliefs.
In these circumstances, the individual can continue to qualify for EIS relief if the sole reason that the individual is connected with the company following the investment is that they (or an associate) are a director who receives, or is entitled to receive, remuneration for their services and where the shares are issued at the following times:
(a) at a time when the director has never before been connected with the company in any way, or been involved in carrying on any part of the trade now carried on by the company (or its subsidiary), whether as an owner of that trade or as a director or employee of the owner;
(b) before three years after a previous issue of eligible shares in respect of which the director satisfied the condition just mentioned; or
(c) before three years after a previous issue of shares in respect of which the director was eligible for SEIS relief.
In short, if the individual is made a director before the first issue of shares is made then it will cause EIS relief to be lost.
Forbes Dawson view
Despite these rules having existed for a long time, we still see examples of mistakes being made. Quite often, in angel investor scenarios there may be “monitoring fees” paid to the individuals or a company that the investors own. As noted, indirect payments may still be caught by the rules. Unless the directors have been appointed after their shares are issued, they may fail to qualify for EIS. Even being appointed a director a day before the shares are issued can permanently deny relief. We often recommend that investors be appointed a day or two after the first share issue to avoid any doubt. The problem with EIS share issues is that shortcuts are taken at the outset which may only come to light many years down the line when the company in question has sold for millions of pounds.
