Connected person rules are regulations set by HMRC that restrict who can claim SEIS or EIS tax relief based on their relationship with the company receiving investment.
The purpose is straightforward: SEIS and EIS are designed to encourage external risk capital into early-stage businesses. They are not intended to provide tax relief to founders, controlling shareholders or insiders who already have significant influence over the company.
Connected person rules (SEIS/EIS), meaning
The connected person rules (SEIS/EIS) focus on preventing abuse of tax relief by individuals who effectively control or materially influence the company.
To define a connected person in practice, HMRC considers whether the investor:
- Is an employee, partner or paid director of the company (with limited exceptions for certain business angel directors under EIS)
- Has a substantial interest in the company (generally meaning ownership or entitlement above a defined threshold)
- Is connected through certain close family relationships
- Has rights that give them control over the company
A clear, connected person rules definition ensures that SEIS/EIS relief is reserved for genuine external investors rather than insiders.
These rules stand for protecting the integrity of the UK venture tax relief system and maintaining fair access for independent investors.
What makes someone “connected”?
Although the exact tests are technical, the main areas HMRC considers include:
Employment or director status
Under SEIS and EIS, investors generally cannot be employees of the company at the time of investment (with some nuanced differences between SEIS and EIS, particularly regarding unpaid or business angel directors under EIS).
Substantial interest test
An investor may be considered connected if they (alone or together with associates) hold or are entitled to acquire more than a specified percentage of:
- Share capital
- Voting rights
- Assets on a winding up
This is commonly referred to as the “30% test” in EIS contexts.
Associates and family connections
Close family members, such as spouses or civil partners, may be treated as connected when applying ownership tests. This prevents indirect structuring to access relief.
Control rights
Control is not only about the share percentage. Rights to appoint directors, influence decisions or otherwise direct company affairs can also create a connection.
Why connected person rules matter in fundraising
When raising SEIS or EIS investment, founders must carefully assess whether each investor qualifies. If an investor is connected:
- They cannot claim tax relief
- The company’s compliance position may be questioned
- Advance assurance may be affected
- Post-investment relief certificates could be invalid
This is why cap table planning and ownership modelling are essential before closing a SEIS/EIS round.
Practical implications for founders
Before accepting SEIS/EIS investment, founders should:
- Review current shareholdings and voting rights
- Consider future share issues and convertibles
- Check whether investors are or will become directors
- Assess family relationships where relevant
- Ensure documentation aligns with scheme requirements
Connected person rules are technical, but their commercial impact is real. A misstep can result in denied tax relief for investors and reputational damage for the company.
The broader purpose
SEIS and EIS exist to stimulate independent risk capital into early-stage UK businesses. Connected person rules ensure that relief supports that policy objective, encouraging outside investors to back growth rather than subsidising insiders.
How UndoCapital supports SEIS/EIS eligibility
Undo Capital helps founders navigate connected person rules by reviewing cap table structure, investor profiles and ownership thresholds to ensure SEIS/EIS compliance. This includes identifying potential connection risks, structuring rounds to avoid disqualifying relationships, and aligning documentation with HMRC expectations, so investors remain eligible for tax relief and the fundraising process runs smoothly.
FAQs
What are Connected Person Rules?
These rules determine whether an investor is sufficiently independent from a company to qualify for SEIS or EIS tax relief.
Why are Connected Person Rules important?
They ensure tax relief is only available to genuine external investors, not insiders.
Who is considered a connected person?
Typically founders, employees, or individuals with significant control or shareholding.
How do these rules affect investors?
If classified as connected, investors may lose eligibility for tax relief.
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