Who can invest under SEIS: eligibility and the connection rules

In short: to claim SEIS relief you must be an individual with a UK income tax liability, you must not be an employee of the company, and you and your associates must not hold more than a 30% interest in it. The tests are set out in HMRC's Venture Capital Schemes Manual.

You need tax to relieve

Income tax relief reduces an income tax bill. It is not a payment. If your liability for the year is smaller than the relief you are entitled to, the excess is not refunded, although carry back may let you use it against the previous year instead. This is the single most common reason an investor ends up claiming less than they expected.

The 30% interest test

You cannot hold, directly or indirectly, more than 30% of the company's ordinary share capital, voting power, or rights to assets on a winding up. The test looks at your holding together with your associates', and it applies from incorporation through to the end of the three-year period.

Associates for this purpose include your spouse or civil partner, your parents, grandparents, children and grandchildren, and your business partners. Notably it does not include siblings. Trusts you have an interest in can count too.

Employees are out, directors are in

An employee of the company, or of a subsidiary or partner company, cannot claim SEIS relief on shares issued while that employment continues. A director can, and can also be paid reasonable remuneration for the role. The distinction is between an employment contract and a directorship, and it is a question of fact rather than job title.

Receiving value from the company

Relief is withdrawn if you receive value from the company during the qualifying period. That covers a wider range of transactions than most people assume:

• The company buying back or redeeming your shares.
• The company repaying a loan you made to it before you subscribed.
• The company releasing you from a liability, or paying one on your behalf.
• Assets sold to you at less than market value, or bought from you at more than market value.
• Payments for goods or services beyond what is commercially reasonable.

Ordinary commercial dealings on arm's length terms, and normal dividends, are fine. Anything unusual is worth checking before it happens.

The shares themselves

The shares must be new ordinary shares, subscribed for in cash, fully paid up on issue, and carrying no preferential right to dividends or to assets on a winding up, and no right of redemption. In other words, full risk. Converting an existing loan into shares does not qualify, and neither does buying shares from an existing shareholder.

There must also be no pre-arranged exit, no arrangement to protect your capital, and no reciprocal arrangement in which two investors each back the other's company. HMRC calls this the risk-to-capital condition, and it is applied to the whole picture rather than any single term.