Can Founders and Their Family Benefit from SEIS, the 30% Connected-Person Rule

One of the most common questions founders ask is whether they, or members of their family, can put their own money into the company and claim SEIS relief on it. The answer is a qualified yes for some founders and a firm no for others, and the line is drawn by HMRC connected-person rules. This article is part of our SEIS and EIS series and sits beneath the flagship pillar, the complete SEIS and EIS founders guide at /guides/seis-eis-guide-uk-startups/, which sets out the schemes in full.

It pairs with two companion articles. One compares the two schemes in detail, SEIS versus EIS and the key differences founders must know, at /blog/seis-vs-eis-key-differences-founders-must-know/. The other explains how much you can raise under each scheme at /blog/seis-eis-investment-limits-how-much-you-can-raise/. Here we focus on the connection rules that decide whether a founder or relative can claim.

SEIS and EIS exist to channel outside risk capital into young companies. To stop the schemes being used to subsidise a founder backing their own business, HMRC restricts relief for investors who are connected with the company. Connection can arise in two ways: through a financial interest, meaning the size of the shareholding, and through employment, meaning being an employee or, in some cases, a director.

If an investor is connected at any time from the date the company was incorporated, or two years before the share issue if later, until three years after the issue, their relief is at risk. The rules look both backwards and forwards, which is why founders need to think about connection across the whole qualifying period, not just on the day they invest.

The central rule is the 30% test. An investor is connected with the company, and so cannot claim relief, if they, together with their associates, hold or are entitled to acquire more than 30% of any of the following: the ordinary share capital, the issued share capital, the voting rights, or the rights to assets on a winding up. The test is applied to the combined holding of the investor and their associates, not to each person separately.

The phrase "entitled to acquire" matters. It captures options, convertible instruments and other rights to shares, not just shares already held. A founder sitting on a large option pool, or with convertible loan notes, may breach the 30% threshold even if their issued shareholding looks modest. This is one reason cap-table planning should happen before, not after, a round.

A worked example

Suppose a company has 100,000 ordinary shares. A founder holds 25,000 and their spouse holds 10,000. Because spouses are associates, their holdings are aggregated to 35,000, which is 35% of the share capital. Both are therefore connected and neither can claim SEIS or EIS relief on any further shares they subscribe for, because the combined holding already exceeds 30%. Splitting the investment between them does not help, since associates are added together.

The definition of associate is wide and is where families are caught. For these rules, associates include a spouse or civil partner, parents, grandparents and other ancestors, children, grandchildren and other lineal descendants, and business partners. Trustees of a settlement where the investor is a settlor or beneficiary can also be associates.

It is just as important to note who is not an associate. The list below sets out family members whose holdings are aggregated with the investor and those whose are not.

• Counted as associates: spouse or civil partner, parents and grandparents, children and grandchildren, business partners, and certain trustees.
• Not counted as associates: brothers and sisters (siblings), uncles and aunts, nephews and nieces, and cousins.
• Practical effect: a sibling can often invest and claim relief where a parent or spouse cannot, because siblings are outside the associate definition.

Because siblings sit outside the associate net, a brother or sister investing in a founder company can frequently claim relief even though a parent in the same family cannot. This is a genuine planning point, but it must be handled honestly: the investment has to be real risk capital on commercial terms, not a device.

The second route to connection is employment, and this is the single biggest difference between the two schemes for founders. Under EIS, an employee of the company is generally connected and cannot claim relief, and a director can usually only claim under restricted conditions. Under SEIS, the rules are more generous: a director, including a paid director, can invest and claim SEIS relief, provided the 30% financial-interest test is not breached.

This makes SEIS uniquely useful to founders who are also directors. A founder-director who holds 30% or less of the company can put their own cash into the SEIS round and claim 50% income tax relief on it, something EIS would usually deny them. The catch is the 30% ceiling: most founders hold far more than 30% at the seed stage, which is why this works for some founder-directors and not others.

It is worth dwelling on the phrase "entitled to acquire", because it is where careful-looking cap tables come unstuck. The 30% test does not only count shares a person already holds; it counts shares they have a right to acquire. That sweeps in unexercised share options, warrants, convertible loan notes and any other instrument that converts into equity. A founder-director who holds 28% of issued shares but has options over a further 5% is treated as entitled to 33% and is therefore connected, even though they have not exercised a single option.

The same logic applies to associates. If a founder holds 25% and their spouse holds options over 8%, the aggregated entitlement is 33% and both are connected. Anyone planning to claim relief should map not just the current share register but every option, warrant and convertible that could be called on, and check the combined figure against 30% before issuing the relief-bearing shares.

Connection is tested across a window, not a single day. For the financial-interest test, the relevant period runs from incorporation, or two years before the share issue if that is later, to three years after the issue. An investor who becomes connected at any point in that window, for example by acquiring more shares or options that push them over 30%, can lose relief retrospectively. Founders raising follow-on rounds should model how each new issue affects existing investors connection status.

The forward-looking element is the one founders most often overlook. A relative who claims relief on a clean 20% holding can still lose it if, eighteen months later, a bonus issue or a further subscription pushes their aggregated holding over 30% inside the three-year window. The lesson is to treat each new share issue as a moment to re-test the connection status of everyone who has already claimed, not just the new investors coming in.

Most connection problems are avoidable with planning. The errors below recur often enough that they are worth checking against your own cap table before you issue shares.

• Aggregating spouses by accident: a couple each subscribing for shares whose combined holding tips over 30%.
• Forgetting options: a founder under 30% on issued shares but over 30% once unexercised options are counted.
• Treating a director investment as automatically EIS-eligible, when EIS usually denies directors relief and SEIS would have allowed it.
• Letting a later round push an early investor over 30%, withdrawing relief they had already claimed.

There is a subtle interaction between the personal connection rules and the company-level limits that founders should keep in view. The connection rules cap an individual investor relief; the company limits cap the total the company can raise. A founder-director who is under 30% and claims SEIS on their own subscription still uses up part of the company £250,000 SEIS allowance. So a founder investing personally is not free money: it consumes scheme headroom that an outside angel could otherwise have taken. The companion article on the SEIS and EIS investment limits at /blog/seis-eis-investment-limits-how-much-you-can-raise/ sets out those ceilings in detail.

Where a founder or family member does claim relief, the paperwork has to stand up. The shares must be ordinary shares issued for cash, fully paid at issue, with no preferential rights, and the subscription has to be on the same commercial terms as any other investor in the round. HMRC can and does query connected-party investments, so the company records, board minutes and the SEIS1 or EIS1 compliance statement need to reflect a genuine arm length subscription. An accountant experienced with the schemes will make sure the connection position is assessed before the shares are issued, not discovered afterwards.

In short, founders can sometimes benefit from SEIS personally, most often as founder-directors holding 30% or less, and family members can sometimes invest depending on how closely related they are. The 30% test and the associate definition are unforgiving, and they interact with options, convertibles and follow-on rounds in ways that are easy to get wrong. Because the rules are detailed and the cost of breaching them is the loss of relief, model your cap table and take professional advice before any founder or relative subscribes for shares.

For the full framework, read the flagship pillar at /guides/seis-eis-guide-uk-startups/, and see the companion articles on the scheme differences and the investment limits to complete the picture.