You've been offered a stake in an early-stage company, the term sheet says convertible loan note, and somewhere in the back of your mind is the relief: 30% for EIS, 50% for SEIS, the reason a lot of angels can stomach the risk at all. So the question is fair and it's common - does a convertible loan note qualify for EIS or SEIS?
The short answer is no. A convertible loan note, or CLN, is a loan. SEIS and EIS relief attaches to shares, not to debt, and a CLN issues no shares when your cash goes in. Put the money in this way and you generally can't claim, and you can quietly forfeit relief you assumed was coming. Here's why the instrument fails the test, and what an angel can use instead.
The company can qualify and you still lose the relief - because the money went in as a loan.
The short answer: no, because it's a loan
SEIS and EIS relief is built around one thing: new, full-risk ordinary shares, issued to you and paid for in cash at the moment you invest. A convertible loan note doesn't do that. When you fund a CLN you're lending the company money. No shares change hands on day one - they only appear later, if and when the note converts. There's nothing for the relief to attach to at the point your cash goes in.
That's the heart of it. The relief follows shares; a CLN starts life as debt. This catches people out because the company itself can be a textbook SEIS or EIS prospect - young, small, trading - and none of that helps if you've routed your money through the wrong instrument. The eligibility of the business and the eligibility of your investment are two separate tests, and the CLN fails the second one.
What a convertible loan note actually is
A convertible loan note is a short-term loan to a company that's designed to turn into equity later, usually at the next priced funding round. Founders like it because it's quick and cheap to paper, and it lets them take money in without having to agree a valuation on the spot - that gets settled when the round closes.
The terms typically include a few things a plain loan would have, plus a couple that sweeten the conversion. There's often interest accruing on the loan, a discount that lets you convert at a lower price than the next round's investors pay, sometimes a valuation cap, and a maturity or redemption provision saying what happens if conversion never occurs - frequently, the loan becomes repayable. Until conversion, you are a creditor of the company, not a shareholder. That status is exactly the problem.
Why a CLN fails the EIS test
A CLN trips the rules in two distinct ways, and either on its own is fatal to relief.
No shares when the money goes in. The reliefs require shares to be issued and fully paid in cash at the time of investment. A CLN issues nothing then. By the time it converts, the conditions that decide eligibility - the company's age, size and other limits - are tested afresh at that later date, and the cash you actually put up went in as a loan, not a subscription for shares. The timing simply doesn't line up with what HMRC needs to see.
Debt-like and redemption features. Even setting timing aside, SEIS/EIS shares have to be ordinary shares carrying no preferential rights and, crucially, no redemption or protection features - nothing that looks like a guaranteed return of capital. A loan note is the opposite of that by design: it carries interest, it can be repaid, and it ranks as debt. Those are precisely the protections the schemes exclude, because the relief is meant to reward genuine, at-risk equity. A note that can hand your money back, with interest, isn't at risk in the way the rules demand.
HMRC sets out what qualifying shares must look like in its guidance for investors. Read against it, a standard CLN doesn't get close.
What can qualify instead
If keeping the relief matters to you, the money generally needs to go in as equity, or through a pre-round instrument purpose-built to convert into equity on HMRC's terms. Two routes do the job.
- A priced ordinary-share round. This is the clean case. The company agrees a valuation, you subscribe for new full-risk ordinary shares and pay for them in cash, and the shares are issued to you there and then. Everything the relief needs happens at once. See which deal structures keep your SEIS/EIS relief for how the instruments compare.
- A properly structured Advance Subscription Agreement. An ASA is the UK's EIS-compatible answer to a pre-round instrument. It's a non-refundable advance payment for shares to be issued, and it can qualify if it's built to HMRC's expectations: no interest, no open-ended discount that behaves like a return, the advance can't be refunded or varied, and the shares are issued by a short longstop date - around six months. Confirm the current ASA conditions at GOV.UK before relying on one, and read our piece on whether SAFEs are EIS-eligible for the contrast with the US instruments people often confuse it with.
One practical safeguard sits over both: get the company to use HMRC's advance assurance, and have the share class and timing checked before you sign. That's where relief is usually won or lost.
A note on what this isn't
This is an explanation of how the rules work, not a steer towards any structure or any deal. The relief never makes a loss-making company a good outcome, and early-stage companies are among the most likely investments you can make to lose the lot - the instrument question is downstream of all that. The detail here is genuinely fiddly, it turns on the exact drafting, and it changes with the Budget cycle. Confirm the current position in HMRC's guidance on the venture capital schemes, and take FCA-regulated advice on your own situation before you commit capital.
Frequently asked questions
Can a convertible loan note get EIS or SEIS relief?
No. A convertible loan note is a loan, and SEIS/EIS relief attaches to new full-risk ordinary shares issued and paid for in cash when you invest. A CLN issues no shares at that point, so there is nothing for the relief to attach to. Funding a company through a CLN can mean you lose relief you expected to claim.
Why doesn't a CLN qualify for EIS?
Two reasons, and either alone is enough. First, no shares are issued when your money goes in - it goes in as debt, and the relief needs shares issued and paid for at that time. Second, a loan note carries debt-like features such as interest and redemption terms, and EIS shares cannot carry redemption or protection rights. The reliefs are meant for genuine at-risk equity.
What's the EIS-friendly alternative to a CLN?
Usually a priced ordinary-share round, where new full-risk ordinary shares are issued and paid for in cash at the time you invest, or a properly structured Advance Subscription Agreement built to HMRC's conditions: non-refundable, no interest, no open-ended discount, and shares issued by a short longstop date of around six months. Confirm the current conditions at GOV.UK.
What if the CLN converts into qualifying shares later?
Conversion does not rescue the position in the way people hope. The cash you put in went in as a loan, and the company's eligibility is tested afresh at the later conversion date rather than when you advanced the money. The timing and the debt features mean a standard CLN generally fails the test. Have the structure checked before you sign rather than after.
Is this financial advice?
No. This is general information about how the SEIS and EIS rules treat different instruments, not advice on any structure or deal for your situation. The rules are detailed, depend on the exact drafting and on your circumstances, and change over time. Confirm the current position at GOV.UK and take FCA-regulated advice before you act.