Last updated: 14 October 2026
Should you lend your friend money or buy shares in their new company?
It depends on the risk you want to take and the tax relief available. A loan is repaid before shareholders if the company does well, and you can charge interest, but relief for a bad debt is limited. Buying new shares can qualify for SEIS (50% income tax relief) or EIS (30%), with CGT-free growth and loss relief if the company fails. If the company doesn’t qualify for those schemes, shares still allow a capital loss claim against income in some cases, through share loss relief.
Loan versus shares
| Feature | Loan | Shares (SEIS or EIS qualifying) |
| Income tax relief on investment | None | 50% (SEIS) or 30% (EIS) |
| Return | Interest, taxable at your rates | Dividends and capital growth |
| CGT on growth | n/a | Exempt after 3 years |
| If the company fails | Capital loss on a qualifying loan to a trader (limited relief) | Loss relief against income, net of relief received |
| Priority on insolvency | Ahead of shareholders | Last |
| Control | None | Shareholder rights |
Tax relief on a failed loan
If you lend to a UK trading company and the loan becomes irrecoverable, you can claim a capital loss under the loans to traders rules. It’s set against gains, not income, so it’s often less valuable. Relief isn’t available if you voluntarily release or waive the loan, so take advice before writing it off.
Example
Jamie’s friend starts a brewery. Jamie can lend £20,000 at 6% or buy £20,000 of new shares under SEIS. With SEIS, he gets £10,000 off his income tax straight away. If the brewery fails, he can claim loss relief on the net £10,000 against income, saving another £4,000 as a 40% taxpayer, so his real loss is £6,000. With a loan, he’d get £1,200 a year taxable interest, but if it failed, only a capital loss of £20,000 against gains.
Mixing the two
Investors sometimes take a small shareholding and lend the rest. If you lend to the company, SEIS or EIS may be restricted, because loans with certain terms can be treated as disqualifying arrangements. Get advice before mixing.
Before you invest
- Check the company has SEIS or EIS advance assurance
- Get a written agreement for loans
- Agree what happens if the business needs more money
- Consider the impact on your friendship
Common mistakes
- Buying existing shares from your friend (no SEIS/EIS)
- Holding more than 30% and losing SEIS/EIS
- Lending informally without any documentation
- Expecting income tax relief on a failed loan
Records to keep
Keep share certificates, SEIS3 or EIS3 certificates, loan agreements and correspondence about repayment.
Convertible loans
A convertible loan that turns into shares later is another option. It doesn’t qualify for SEIS or EIS while it’s a loan, and conversion may not qualify either, so a direct share subscription is usually needed for relief.
Frequently asked questions
Can I get relief if I’m a director?
For SEIS yes; for EIS only if unpaid initially.
Is interest from my friend’s company taxable?
Yes, and the company deducts 20% tax.
Can I invest through my company?
Yes, but SEIS/EIS relief is for individuals.
What if the company is overseas?
It needs a UK permanent establishment for SEIS/EIS.
Related: SEIS relief, family loans and interest and tax deducted from interest.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with investing in small companies. See our limited company accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
