SEIS and EIS for Founder-Directors: The 30% Connected-Person Rule

Most founders are not just shareholders. They are directors, often paid, sometimes employees on a contract, and increasingly investors putting their own cash into the company alongside outside angels. SEIS and EIS treat each of those roles differently, and the rules change depending on which scheme the company is using.

The practical question is whether a founder can invest, remain involved in running the company, receive reasonable pay and still qualify for relief. The answer depends on the founder's ownership percentage, employment status, director role and the rights held by their associates.

The schemes are designed to channel outside risk capital into young trading companies. To stop them being used as a way for founders to subsidise their own income, the rules limit when a person already inside the company, as a director or employee, can claim relief on their own subscription. Those limits sit alongside the connected-person rules for founders and their families, and they apply differently to SEIS and EIS.

A clean way to think about it: SEIS recognises that the earliest investors in a brand-new company often are the founder-directors themselves and lets them claim, subject to limits. EIS, designed for the growth stage, generally assumes investors are outside the company, with one narrow exception for business-angel directors. The detail of each rule sits below.

Under SEIS, a director, including a paid director, can subscribe for SEIS shares and claim relief on the subscription, provided the financial-interest test is not breached. The financial-interest test, often called the 30% test, looks at the share capital, voting rights and rights to assets on a winding up held by the investor and their associates. If the combined holding exceeds 30%, the director is connected and the relief is not available, regardless of which scheme is being used.

For founder-directors of brand-new companies, the relief on offer is genuine: they can claim 50% income tax relief on up to their personal SEIS allowance for the tax year, provided they hold 30% or less of the company. The catch, of course, is that many founders hold far more than 30% at the very earliest stage, which is why the SEIS director route works best for second or third founders with smaller stakes and for founder-directors who have already brought in external investors and diluted below the threshold.

EIS approaches the same question from the opposite direction. As a starting rule, employees of the company are barred from claiming EIS relief on shares in their employer, and directors are also generally treated as connected and cannot claim. The point is to keep the scheme focused on outside investors backing the company growth, rather than on people already drawing income from it.

The employee bar is wider than founders sometimes assume. Contracts of employment, executive service agreements, and certain consultancy arrangements that have employee-like features can all trip the rule. A founder who has converted from a director role into a salaried executive can find themselves blocked from EIS on their own subscription even though SEIS would have allowed it earlier. Where the role is genuinely that of a director rather than an employee, the narrow business-angel director exception described below can sometimes apply.

EIS contains a narrow exception that allows certain directors to claim relief, often called the business-angel director rule. In broad terms, an unpaid director, or a director who only becomes paid after subscribing for EIS shares, can claim relief on those shares provided strict conditions are met. The director must not have been previously connected with the company in a way that disqualifies them, the remuneration after appointment must be reasonable for the services provided, and the role must be a genuine non-executive contribution.

The exception is real, but it is not a workaround for executive founders. The wording of the legislation, the spirit of the rule, and HMRC practice all point towards a person who joined as an investor first and took a board seat to support the company, rather than an existing executive who has restructured their pay to slip inside the wording. As with everything in this area, the safe path is to map the facts against the rule with an accountant before any shares are issued.

The role rules sit alongside a company-side requirement that often gets less attention. The company must be carrying on, or preparing to carry on, a qualifying business activity throughout the relevant period: a new qualifying trade for SEIS, and an existing or new qualifying trade for EIS. The trade must be carried on commercially with a view to profit and must not be wholly or substantially an excluded activity.

Excluded activities are listed in detail in the legislation and include, among others, dealing in land, dealing in commodities or shares, banking, insurance, leasing, legal and accountancy services, property development, hotels and nursing homes. The list is technical and the boundaries are sometimes finer than they appear: a company whose trade looks like development might in fact qualify if it sits on the design side of a development chain, and vice versa. Borderline trades are an obvious case for advance assurance.

The qualifying-activity rule is not just a check on what the company does at the start. It must continue to qualify throughout the period during which the relief depends on the company, broadly the three-year holding window covered in the companion article at /blog/seis-eis-three-year-holding-period-disposal-events/. A pivot from a qualifying trade into an excluded activity inside that window can withdraw relief, even if the original business plan was rock solid.

For founder-investors this is the link between role and relief: a founder claiming SEIS as a director relies not just on personally meeting the role and connection tests, but on the company continuing to meet the qualifying activity test. The relief is genuinely co-dependent on both halves.

The shapes below come up often enough that they are worth running through. Each is a starting point for thought, not a definitive answer, because the conditions are layered and the facts always matter.

• Solo founder-director holding 90% and subscribing for SEIS: blocked by the 30% connection rule, regardless of director status.
• Two co-founders each holding 40% with no associate aggregation between them: both blocked under either scheme by the 30% rule.
• Three co-founders each holding around 25% with no spouse aggregation: each can potentially claim SEIS on their own subscription, since each is under 30%.
• Early employee taking a small EIS subscription as a thank-you: blocked by the employee rule.
• External angel who joins the board after subscribing for EIS: potentially within the business-angel director exception, subject to conditions.
• Founder-director who restructures pay to look unpaid at the moment of subscription: high risk of failing the exception in substance.

Founder pay arrangements interact with the role rules in two specific ways. First, large salary packages or unusual bonus arrangements can colour the question of whether the director role is genuine and whether the remuneration is "reasonable" for the EIS exception. Second, share options granted to a director or employee can count towards the 30% financial-interest test, because the entitlement to acquire shares is included, even before the options are exercised.

A founder who is genuinely under 30% on their issued shares but holds options that take them above 30% on a fully-diluted basis is treated as connected. This is a common and avoidable trap: the share register looks compliant, but the option grants tip the balance. The founder and family connection rules explain the "entitled to acquire" point in more depth.

A worked example for a paid founder-director

Suppose a founder-director draws a modest salary, holds 22% of the issued shares, and has been granted options over a further 10% under a forthcoming option pool. On issued shares alone they are under 30%. Once the option entitlement is added in, the combined figure is 32%, which fails the test. The director would not be able to claim SEIS or EIS relief on a personal subscription, even though the salary, the role and the cap-table headline all looked compliant.

Founders often want to invest because it sends a confidence signal to outside angels. The relief can be a meaningful part of the case, but the analysis needs to be done in the right order. The bullet points below capture the conditions under which a founder personal subscription is a sensible plan.

• The founder is under 30% on a fully-diluted basis after associates are aggregated and options are counted in.
• The company is using SEIS, where directors can claim; or the founder is an unpaid director sitting inside the EIS exception.
• The shares are plain ordinary shares with no preferential rights, issued on the same commercial terms as outside investors in the round.
• The subscription is genuinely from the founder personal funds, not from a related-party loan or a circular arrangement that risks falling foul of the anti-avoidance rules.
• The personal allowance and the company-level allowance for the year are both still available.

The role rules and the anti-avoidance rules are designed to dovetail. A founder who meets the technical wording of the EIS director exception, but whose arrangement substantively converts salary into reliefed investment, can still fail the risk-to-capital and anti-avoidance tests. A director investment that returns value through loans or service payments can also breach the holding-period and value-received rules.

Where a founder is going to claim on their own subscription, the file should make the analysis explicit. Board minutes should record the share class as ordinary, the terms as identical to those offered to other investors in the round, and any remuneration arrangements as reasonable for the role. The cap table at the time of issue should be modelled on a fully-diluted basis and the connection position recorded. The SEIS1 or EIS1 compliance statement and the SEIS3 or EIS3 certificates should reflect the same facts. Good documentation does not prevent HMRC asking questions; it gives clear answers when they do.

Founder roles, SEIS and EIS work together when the structure is right, and they collide when it is not. SEIS is the scheme that lets founder-directors claim relief on their own money, subject to the 30% ceiling. EIS is the scheme that brings in outside growth capital, with a narrow window for unpaid director investors and a firm bar on employee investors. The qualifying business activity sits underneath both, requiring the company itself to keep trading in a way that satisfies the rules. The detail is technical and the cost of getting it wrong is the loss of relief, so for any founder considering a personal subscription, this article is orientation rather than authority and the specific facts deserve professional advice.

For the full framework, read the flagship pillar at /guides/seis-eis-guide-uk-startups/, and pair this article with the other new spokes on anti-avoidance and on the three-year holding period.