Income Tax Act 2007 section 157A

Risk-to-capital condition

Section 157A sets out the risk-to-capital condition that must be met for shares to qualify under the Enterprise Investment Scheme, ensuring that the investment carries genuine commercial risk rather than being structured primarily to deliver tax-advantaged returns with little real risk to investors' capital.

• At the time shares are issued, it must be reasonable to conclude that the company has genuine long-term objectives to grow and develop its trade, and that investors face a significant risk of losing more capital than they receive back in total returns (including the value of EIS relief)
• The risk of capital loss and the net investment return are assessed by reference to investors generally, not any individual investor, and the net return takes into account income, capital growth and the value of EIS tax relief
• HMRC may consider a wide range of factors including the company's growth ambitions, income sources, asset base, use of subcontractors, ownership and management structures, and how the investment opportunity is marketed
• Where the issuing company is a parent company, the trade and circumstances are assessed across the group as a whole, treating the combined activities of all group companies as a single trade