For experienced founders raising through the Enterprise Investment Scheme (EIS), most conversations centre on advance assurance, closing the round, and issuing EIS3 certificates.
However, this approach can often leave founders in the dust should problems or unforeseen circumstances arise after the EIS shares are issued.
One of those is if an investor jumps ship before their qualifying period - what happens if an investor exits before the three-year qualifying period?
EIS is designed to incentivise long-term, risk-bearing capital. The tax benefits are impressive, but conditional. If an investor disposes of their shares too early, those benefits can be rescinded.
To retain EIS tax relief, shares must generally be held for at least three years from the later of:
During that period:
A breach of these conditions can result in a withdrawal of the tax reliefs offered to investors.
Income tax relief
EIS offers 30% income tax relief for investors on the total qualifying amount invested.
If shares are sold within the three-year period, that relief is typically withdrawn. HMRC can claw back the relief already claimed, creating an unexpected tax bill for the investor.
For example, on a £200,000 investment, £60,000 of Income Tax relief could be repayable.
Capital Gains Tax (CGT) exemption
One of the most attractive features of EIS for investors is that gains made are exempt from CGT after three years. Exit early, and that exemption is lost. Any gain on disposal is taxed in the normal way.
Any investors who are banking on the tax-free upside potential of their gains should understand that an early exit will impact their expected returns.
CGT deferral relief
Sophisticated investors may use EIS to defer an existing capital gain by reinvesting into an EIS eligible business. If they dispose of their EIS shares within three years, that deferred gain freezes, and the tax they postponed becomes payable.
This can be a painful bill, particularly if the original deferred tax bill was substantial.
Loss relief
If the investment underperforms and shares are sold at a loss within three years, the position is slightly more complex.
Income tax relief may still be withdrawn, but investors may be able to claim EIS loss relief by submitting the appropriate documentation to HMRC. The final tax outcome depends on timing and structure.
Yes, and these exceptions are important to keep in mind when considering the reduction of risk of an investment. HMRC recognises that certain things are out of an investor’s control, and so in certain circumstances, the relief is not clawed back.
Company failure
If the company fails, an investor can claim EIS loss relief regardless of how long they’ve held the shares.
The three year rule does not penalise genuine commercial failure. Loss relief remains available to investors, subject to the standard HMRC claim process.
Death of the investor
If an investor dies within the three year qualifying period, this does not trigger a clawback. Instead, the shares pass to beneficiaries, and the associated tax advantages remain intact.
Certain reorganisations
In some company reorganisations, for example, where shares are exchanged for new shares as part of a restructuring, relief can continue without implications.
However, these situations are far more nuanced, and without careful planning and understanding, may risk eligibility on both the recipient and company side.
These exceptions exist because the regime is designed to support genuine long-term investment, and not to punish events outside investor control.
Early exits are pretty rare in EIS-backed businesses, but they do happen - and founders should understand the implications.
Secondary sales within three years are possible, but they are unattractive. The seller risks losing relief, and the buyer cannot claim EIS on second-hand shares. This clearly shows how, for EIS-funded businesses, liquidity is constrained by design.
Company buybacks during the qualifying period can be particularly risky. A poorly structured repurchase may count as receiving ‘value’, jeopardising the relief investors receive.
Early acquisitions require careful thought. In some simple share exchanges, relief can be preserved. In cash-only deals completed within three years, the clawback risk increases.
The structure of the exit often matters more than the timing alone. For founders building toward a fast strategic exit, this needs to be part of planning from the outset.
Complacent founders would view early exit consequences as purely an investor issue. However, depending on the circumstances, these have the power to impact your journey as a founder too.
Early investor exits within the qualifying period impact:
If an investor loses relief overnight (particularly due to internal structural changes or oversights), the friction between them and the founder doesn’t disappear overnight.
For those raising under EIS, the consequences, eligibility requirements, and investor relief should all be a part of your wider growth architecture.
That means:
If you’re planning to raise under EIS, preparation matters just as much as eligibility. Securing advance assurance early can give investors confidence that your structure meets HMRC requirements before investing.
With InVestd Raise, you can prepare for investment properly: apply for EIS advance assurance, manage share issuances, and keep your cap table clean and up to date on one digital platform.