ACCA Advanced Taxation (ATX) Practice Exam

Is a loan to purchase EIS shares considered a qualifying loan for income tax purposes?

1. Yes, always

2. No, it is not qualifying

3. Only if the shares appreciate

4. Yes, if the loan is over £10,000

The correct answer is: No, it is not qualifying

A loan taken out specifically to purchase shares under the Enterprise Investment Scheme (EIS) is generally not considered a qualifying loan for income tax relief purposes. The EIS is designed to encourage investment in small, high-risk companies by offering various tax reliefs to investors. However, for a loan to be considered qualifying for these purposes, it must fulfill certain criteria established by tax legislation. One key aspect is that the tax relief associated with the EIS is intended to incentivize actual investment rather than financing arrangements. When an investor borrows money to purchase shares, the tax benefits from the EIS are focused on the nature of the investment itself rather than how the investment was financed. Since loans themselves do not confer the qualifying status required for tax relief, a loan specifically for this purpose does not meet the qualifying criteria. In contrast, the other options suggest conditions under which a loan could be considered qualifying or mistakenly imply that loans can inherently qualify regardless of the circumstances. Such assumptions overlook the specific legislative definitions pertinent to qualifying loans in the context of the EIS. Therefore, the correct interpretation maintains that a loan for purchasing EIS shares does not qualify for the associated income tax relief.