This thought leadership piece was kindly provided by Mainspring. To find out more about Mainspring’s custody and nominee services, see our website ( or please contact Paul Richardson on or 0300 600 0518.

The Structure of EIS funds

A significant number of the approximate 38,000 investors that invested in EIS qualifying companies last tax year did so via a fund. Moreover, there are 2 types of EIS funds; approved and unapproved. These are not regulatory terms but refer to whether the fund has been “approved” by HMRC. If it has, the investors qualify for relief when they first invest in the fund (for the full amount invested), if it is not, they only gain the tax reliefs when the manager makes an eligible investment into a qualifying company (on an investment-by-investment basis). The predictability of the former makes them attractive to some investors but less flexible than unapproved funds as the manager has only a limited time in which to make their investments. The vast majority of EIS funds are therefore “unapproved”.  Always remember that an ‘approved’ EIS fund, has not been approved by the FCA.

The legal structure of an EIS fund is such that the ‘fund’ is not in fact a legal entity, such as a limited partnership, but is rather a figurative or marketing term used for a series of investments in unquoted companies within a discretionary managed portfolio.

This “fund” is required to be structured as a series of individual portfolios in order to qualify for EIS tax relief as an investor must possess and be seen to be the owner of the shares in the company in which it invests, thus an investment cannot be pooled (via a separate legal entity such as a limited partnership fund) with other investors. Accordingly, the ‘fund’ is typically structured with:

How do EIS Funds Work

The custody agreement, which is the document governing how this arrangement works, can be between the manager and custodian where the investor gives the manager permission to enter into the agreement on his or her behalf. Alternatively, the custody agreement can be a direct agreement between custodian and the investor. In practice, it is simpler for the agreement to be between custodian and manager to better reflect the contractual agreements and avoid the need for multiple signatures, and it means the investor remains the regulated client of the fund manager. We will focus on this arrangement as this is how the majority of EIS funds operate. Nevertheless, the investor will need to see a copy of the custody agreement in both scenarios.

The custodian acts behind the scenes, receiving instructions and providing notices to the manager. When an investor chooses to invest in the fund, they will transfer their investment amount to the custodian and monies will be held until the manager instructs the custodian to invest. The custodian will arrange for the monies to be moved to the investee companies and the nominee will, under the manager’s instruction, sign the legal documents, becoming the legal owner and holding the shares on behalf of the investor.

Share certificates will be held and reported on to the FCA by the custodian. Any rights or votes attributable to the shares will be sent to the nominee as legal owner. The custodian will pass these onto the manager and will not act unless instructed to do so by the fund manager. The custodian will also typically assist with EIS 3 certificates (for an unapproved fund) or an EIS 5 certificate (for an HMRC approved fund), managing the completion and signing of the forms and getting the original certificate to the investor so they can claim their tax reliefs.

Investors do not generally interact with the custodian, allowing the manager to provide a one-stop service to its Investors. Communications and reporting are normally provided by the custodian but will usually be white labelled, so come in the fund managers’ branding.

The FCA regulations governing the role of custodian and nominee are covered in client money and client asset rules (CASS) and conduct of business rules (COBS). The safeguarding of client money and client assets is very high on the FCA’s list of priorities and therefore choosing a firm to carry out this function for your fund is key to successful operations and compliance.

Who Can Invest in an EIS Fund?

Ultimately, EIS funds are not for ordinary retail investors and can only be promoted to investors who have the benefit of advice from an authorised person (typically an IFA or wealth manger) or who qualify and certify as High Net Worth or Sophisticated Investors.

To find out more about Mainspring’s custody and nominee services, please contact Paul Richardson on or 0300 600 0518.

CALL US: +44 20 8132 6199
6 Snow Hill
Message Us