Will the investor qualify for the scheme?

📘 Overview

This article explains when an investor is considered connected to a company for the purposes of SEIS and EIS. If an investor is connected, they are not eligible for Income Tax relief under these schemes.

We outline the two types of connection, how HMRC measures ownership and relationships, and the relevant time periods to keep in mind.

📊 Overview: When an Investor Is “Connected”

An investor is considered connected to the company in either of the following situations:

• Connection by financial interest
• Connection by employment

If either applies, SEIS or EIS Income Tax relief is not available.

Both tests apply for 2 years before and 3 years after the investment is made.

1. Connection by Financial Interest

An investor is connected to a company if they control or own more than 30% of:

• the issued share capital
• the voting rights

HMRC also looks at rights to company assets on a winding up.

How ownership is measured

To decide whether the investor exceeds the 30% threshold, HMRC includes:

• Shares owned by the investor personally
• Shares owned by their business partners
• Shares owned by direct relatives (parents, children, grandparents, grandchildren)

Important: Brothers and sisters are not counted for this purpose.

Time period

The 30% connection test applies:

• 2 years before the investment
• 3 years after the investment

2. Connection by Employment

An investor is connected if they are an employee of the company at any time during:

• 2 years before the investment
• 3 years after the investment

Being an employee is enough for connected status, even if the role is part-time or low paid.

Directors under SEIS

Under SEIS, directors are not treated as employees for this rule.

A director can therefore invest under SEIS without being considered connected by employment (subject to meeting all other conditions).

🔍 Practical Points and Common Pitfalls

• If an investor’s spouse holds shares, these are counted toward the 30% limit, even if the investor does not hold shares personally.
• Family trusts may also count toward the ownership calculation.
• Under EIS, directors can be connected if they are paid or have certain employment-like duties.
• Keep evidence of shareholdings for all connected parties across the 5-year period HMRC reviews.