Advance subscription agreements, convertible loan notes and SEIS and EIS relief

By Buzz Accounting · 19 August 2026

A company that needs money before its next funding round is often offered a convertible loan note by an existing angel investor. Notes are widely used, quick to put in place, and leave the valuation to be agreed at the next round.

A convertible loan note is a loan. Relief under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is given only on shares, so an angel who invests through a note gives up income tax relief of 50p in the pound under SEIS or 30p under EIS, which they may have expected to receive.

An advance subscription agreement (ASA) also brings in money before the round, and it keeps the relief if its terms meet HMRC's conditions, which are stricter than the terms of a typical note.

Why a convertible loan note does not qualify for SEIS or EIS relief

Both schemes give relief on shares subscribed for wholly in cash and fully paid up when they are issued. A convertible loan note fails that test in two ways. The investor pays cash for a loan, and when the note converts, the shares are issued to repay that loan, so they are not subscribed for in cash.

Both schemes also require the investor's money to be at risk. A note that pays interest and must be repaid if the round does not happen removes most of that risk, so HMRC will not give relief on it.

The five conditions an advance subscription agreement has to meet

HMRC's guidance is at VCM33025 for SEIS and VCM12025 for EIS. HMRC will only accept an advance subscription agreement as a subscription for shares if it:

Cannot be refunded in any circumstances. The money cannot be returned for any reason, including insolvency, the round not going ahead, or agreement between the parties. It can only be turned into shares.
Cannot be varied, cancelled or assigned. A side letter extending the longstop date is a variation, so the agreement would no longer meet HMRC's conditions.
Bears no interest. This includes any payment to the investor described as a fee.
Gives the investor no protection. HMRC's guidance says the agreement must not work as an investment instrument offering benefits such as investor protection, so it cannot include security, priority over other investors, a guaranteed minimum return, or a most-favoured-nation clause that works as a protection.
Has a longstop date no more than six months after the agreement is signed. The longstop date is the date by which the shares must be issued. HMRC's guidance says it expects no more than six months and is unlikely to give advance assurance for a longer period.

If an agreement misses one of these conditions, HMRC will not treat it as suitable, which puts advance assurance and the investor's relief at risk. Once the agreement is signed, its terms cannot be changed to fix the problem, because changing them is itself a variation.

Worked example: £40,000 invested through each document

The figures below are illustrative, for a company raising a £150,000 bridging round to last until a priced seed round, with an angel putting in £40,000 at a 20% discount to the round price. The angel is an additional-rate taxpayer.

Under an advance subscription agreement that qualifies for SEIS. The angel subscribes £40,000. When the round completes, shares are issued at a 20% discount and SEIS relief runs from the date of issue. Income tax relief at 50% is £20,000, so the stake costs £20,000 net. If the company later fails and the shares become worthless, the angel can claim loss relief on the net cost against income at their top rate of tax: 45% of £20,000 is £9,000, so the most they can lose is £11,000. If the shares are sold at a gain, the gain is free of capital gains tax provided the shares have been held for three years.

Under a convertible loan note. The angel lends £40,000 at interest, 7% a year in this example. There is no income tax relief, no capital gains exemption and no loss relief against income, and the interest is taxable income when it is paid or converted. The stake costs £40,000. The relief given up is £20,000, half the amount invested, and on a £150,000 bridging round raised entirely through notes the investors give up £75,000 of relief between them.

Tax the company must deduct from note interest (form CT61)

Notes also create a cost for the company. Interest on a loan note that runs, or is capable of running, for more than twelve months is yearly interest. A UK company paying yearly interest to an individual must deduct income tax at 20% at source, report it on a form CT61, and pay it to HMRC within 14 days of the end of the quarter.

On £150,000 of notes at 7% for eighteen months, the interest is £15,750 and the tax to deduct is £3,150. The tax is often due when the notes convert and the interest is paid in shares, so the company has to pay £3,150 to HMRC in cash although it paid no interest in cash.

SEIS and EIS limits for 2026/27

For SEIS in 2026/27: a £250,000 lifetime limit for the company, £200,000 a year per investor, gross assets no more than £350,000 immediately before the share issue, fewer than 25 full-time equivalent employees, and the trade under three years old at issue.

For EIS, the ceilings doubled on 6 April 2026: £10m in any rolling twelve months and £24m over the company's life, with gross assets up to £30m before the investment and £35m after, fewer than 250 employees, and the investment made within seven years of the company's first commercial sale, with some exceptions. Our post on SEIS and EIS for founders covers the qualifying conditions in full, and the SEIS vs EIS comparison sets the two side by side.

Issuing SEIS shares before EIS shares

SEIS shares have to be issued before any EIS shares in the same company. If EIS shares are issued first, the company can no longer use SEIS, and this cannot be reversed.

An ASA makes this easier to get wrong, because the money arrives months before the shares are issued. If part of the bridging round is meant to qualify for SEIS and the priced round for EIS, the SEIS shares must be issued on an earlier day than the EIS shares. If both are issued on the same day, the SEIS shares do not qualify, whatever order the board minutes record, and on a full £250,000 SEIS allocation the investors lose £125,000 of income tax relief.

When a convertible loan note is the better choice

A note can suit the company and the investor better where:

The investor is a fund or a company that gets no personal income tax relief and wants downside protection instead.
The investor is not UK resident and has no UK income tax to relieve.
The company has already used its full SEIS allocation and no longer meets the EIS conditions, so no relief is available.
You cannot commit to issuing shares within six months. An advance subscription agreement with a longer longstop date is unlikely to get advance assurance.

What to do this week

Read the document you have been sent. If it provides for interest, repayment, redemption, security or assignment, it will not qualify as an advance subscription agreement, whatever its title.
Set the longstop date at six months or less, and be realistic about whether the round will close by then. If it has not, the shares are issued at the price the agreement sets for that case, and the date cannot be extended.
Apply for advance assurance before the agreement is signed. HMRC reviews the agreement itself, and a term it objects to cannot be changed once the agreement is signed.
Agree the discount before signing. A discount so large that it works as a guaranteed return may lead HMRC to treat the arrangement as protecting the investor from risk.
Set out in the agreement how the shares will be issued: SEIS shares first, and EIS shares on a later day, with the register of members updated for each.
If notes are already in issue, work out the tax to deduct and report on form CT61 before they convert, and include it in the cashflow forecast. Our startup funding guide covers how a bridging round fits with other funding.
Tell your investors which document they are signing and what it means for their tax relief.

Where we help

We apply for SEIS and EIS advance assurance, review the advance subscription agreement before it is signed, prepare the compliance statements that let investors claim their relief, and plan the order of share issues so the SEIS shares are issued first. Where existing notes are converting, we deal with the CT61 returns. Advance assurance is £499 + VAT, and the compliance statement with investor certificates is £599 + VAT. Your monthly accounting fee comes from the instant quote. Get started.

Common questions

Can investors claim SEIS or EIS relief on a convertible loan note?

No. Both schemes give relief only on shares subscribed for wholly in cash and fully paid up when issued. With a convertible loan note the investor makes a loan, and the shares are later issued to repay it, so they are not subscribed for in cash. The schemes also require the investor's money to be at risk, and a note that bears interest and is repaid if no round happens removes most of that risk. An advance subscription agreement, which cannot be repaid and cannot bear interest, can qualify instead.

What is the maximum longstop date on an advance subscription agreement?

Six months from the date of the agreement. HMRC's guidance says that, as a general rule, it expects the longstop date to be no more than six months away, and that for a longer period it is unlikely to give advance assurance. If the round cannot close within six months, a loan note may suit better, accepting that it will not qualify for relief.

Can an advance subscription agreement pay interest or be repaid?

No. HMRC requires that the money cannot be refunded in any situation, including insolvency or the round not going ahead, and that the agreement bears no interest in any form, including fees that work as a return. The agreement also cannot be varied, cancelled or assigned, and cannot give the investor protections such as security or a guaranteed minimum return. These terms mean the investor's money is at full risk from the day it is paid, which is what allows the agreement to qualify for relief.

When does the three-year SEIS holding period start?

On the date the shares are issued. Under an advance subscription agreement that can be several months after the money was paid, which matters in two ways. Relief is given for the tax year in which the shares are issued, or can be carried back to the year before, so the issue date decides which years' income tax the relief can be set against. The three-year holding period for both the income tax relief and the capital gains exemption also runs from the issue date, so selling a few weeks early can mean repaying relief already given. Record the date the shares were issued.

Do we need advance assurance before signing an advance subscription agreement?

Apply before signing. HMRC reviews the advance subscription agreement as part of the application, and if it objects to a term, the term cannot be changed once investors have signed and paid. Advance assurance is not a legal requirement and does not bind HMRC, but many angel investors will not invest without it. HMRC aims to respond to most applications within 15 working days and to complex cases within 40 working days, so allow for that in the timetable.

What discount is normal on an advance subscription agreement?

The discount is agreed between the company and the investor, and reflects the risk of investing before the terms are known. HMRC has not published a maximum, but it looks at whether the investor's money is at risk. A discount so large that it works as a guaranteed return, or a price floor set so low that the investor cannot lose, raises the same objection as interest. Agree the discount and any valuation cap before signing, because the agreement cannot be varied later without losing the relief.

What happens if the funding round does not happen before the longstop date?

The shares are issued on the longstop date at the valuation the agreement sets for that case. Because the money can never be repaid, the company must issue shares on that date. Treat the longstop valuation as a price you may have to accept. Extending the date, or agreeing with the investor to leave the money outstanding, is a variation that loses the relief for every investor in the agreement.

Does the company have to file a CT61 on convertible note interest?

Yes, where the interest is yearly interest, meaning interest on a loan that can last more than twelve months. The company must deduct income tax at 20% from interest paid to an individual, report it on form CT61 and pay it to HMRC within 14 days of the end of the quarter. When accrued interest is paid in shares on conversion, the company still has to pay the tax to HMRC in cash. On £150,000 of notes at 7% over eighteen months, that is £3,150.