Can friends and family invest in my company under SEIS/EIS?

Understanding who HMRC deems a 'connection' or 'associate.'

Please note, this article is based on the current eligibility criteria and funding limits for SEIS/EIS. Read here for information on the changes coming to the schemes in April 2023.

 

Whether your company is still just an idea or you’ve been trading for a few years, it’s only natural that you’ll flirt with the idea of a ‘friends and family’ investment round. 

Friends and family rounds are a quicker and easier way to gain investment compared to finding, pitching and winning over private investors. 

Friends and family tend to make the investment out of good faith based on their relation to the founder (maybe with the hope of future returns), whereas an investor sees a purely commercial opportunity where future returns are a necessity. 

But (depending on their relationship to you) there’s no reason friends and family can’t take advantage of investment schemes such as SEIS and EIS, where generous tax reliefs reduce their at-risk capital and provide an even brighter upside. 

In other words, if your friends and family invest in your SEIS/EIS-eligible company, they can claim up to 50% of their investment back through income tax relief. Plus if they hold onto their shares for at least 3 years, they won’t owe any Capital Gains Tax on share profits. Not bad if their main prerogative is to help you fulfil your ambition. 

Of course, with attractive tax benefits like these, there are rules for investors to meet in order to maintain their tax benefits, but here we’ll explain exactly who can invest in relation to the company.

Which family members can invest in my SEIS/EIS company? 

Of course, family members may be the first people you turn to when seeking investment. The good news is that not all family members are off-limits for SEIS/EIS tax benefits, but some are. 

In short, the spouses/civil partners, parents/grandparents, children/grandchildren of anyone with a substantial interest (30% or more shares or voting control) in the company, or an employee of the company, will not be eligible. These relatives, partners and employees are what HMRC deems ‘associates’ of the issuing company and are therefore ineligible. 

However, siblings, aunts and uncles, nieces and nephews, cousins and friends are all eligible (so long as they themselves aren’t an employee or hold more than 30% of the company). 

For example, the spouse or parent of a founder with a 50% stake would not be eligible, but the founder’s brother would be. Similarly, all employees and their ‘associates’ would not be eligible, but an employee’s sibling who happens to be an investor would be. 

Can directors invest in their own companies? 

It’s worth noting that no employees are eligible to invest under SEIS/EIS, but directors are eligible in certain situations. 

Under SEIS, paid directors can make an investment before or after taking up the position and still claim tax relief. 

Under EIS, directors cannot claim tax relief if they’re paid directors at the time the investment is made, unless their pay is ‘permitted payment’ (i.e. reimbursements, dividends, commercial rent). 

If you’re an unpaid director (and are not entitled to any payment) at the time the investment is made, you can claim EIS tax relief, as long as you haven’t been involved in the same trade the company is seeking investment for. 

There is another caveat in that if you are a paid director, you can claim EIS tax relief if you were: 

  • issued shares before you became a paid director, and any new shares are issued within either 3 years of the original share issue or the date the company started trading.
  • issued with SEIS shares while you were a paid director of the company, and the new EIS share issue is within 3 years of the SEIS share issue.

Of course, this is all dependent on the directors (paid or unpaid) not having a substantial interest in the company (30% or more shares or voting control) before or after the investment.

 

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'