Liquidation Preference and EIS qualification

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    Jonathan Lea

    We are being increasingly asked whether an investor can claim EIS tax relief and also be able to benefit from a ‘liquidation preference’ clause without this invalidating the EIS qualifying criteria.

    As far as we understand, a preference on liquidation would disqualify the business for EIS purposes.

    However, until recently investors have been able to receive a preference on the sale of a business and still benefit from EIS – be careful how you describe the clause though as ‘liquidation preference’ is the commonly used term (whereby such preference will apply on a sale/exit as well as liquidation) and that is going to raise alarm bells.

    However we have heard a recent report where an inspector rejected an advance assurance application where there was a preference on a sale and he would only approve the application once it was offered to remove all reference to this in the documents. We know people who are in contact with the policy setters to seek clarification on whether it’s allowable or not as it is currently differing across inspectors.

    Sorry that’s not a definitive answer, but I hope it helps..

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