What is the 30% shareholding test for SEIS/EIS?
The 30% shareholding test determines whether an investor is a 'connected person'. If you (together with associates) hold more than 30% of a company's shares, voting rights, or rights to assets on winding up, you cannot claim EIS tax relief. Under SEIS, you also lose relief if you exceed 30%.
Detailed Explanation
The 30% shareholding test explained
The 30% test is one of the key investor-side conditions for SEIS and EIS tax relief. It exists to prevent majority shareholders from using the schemes to get tax relief on what is effectively their own business.
What counts towards the 30%?
The test looks at three things, and exceeding 30% on any of them makes you connected:
- **Ordinary share capital** - your percentage of the total ordinary shares
- **Voting rights** - your percentage of total voting power
- **Rights to assets** - your percentage entitlement on a winding up
Associates are included
Your holding is aggregated with the holdings of your 'associates'. Associates include:
- Spouse or civil partner
- Parents and grandparents
- Children and grandchildren (lineal descendants)
- Business partners in a partnership
Siblings are not associates. Friends and unrelated co-founders are not associates.
Example
You hold 20% of shares, your wife holds 15%. Your combined holding is 35%, so you are both connected persons and neither can claim EIS relief. Under SEIS, you also cannot claim.
The timing of the test
The test applies at any point from the date the shares are issued until 3 years after that date (the minimum holding period). If your holding exceeds 30% at any time during this period, you lose relief. This means:
- Taking on new shares that push you over 30% will cause a clawback
- Other shareholders selling shares, which increases your percentage, could also trigger the test
- Share buybacks that concentrate ownership can be problematic
Different share classes
If the company has multiple share classes, HMRC looks at the overall picture. Preference shares, growth shares, and ordinary shares are all considered. The calculation can become complex with multiple classes having different rights.
EIS vs SEIS difference
Under both EIS and SEIS, exceeding 30% disqualifies you. However, under EIS, being a director or employee also disqualifies you regardless of shareholding. Under SEIS, directors can claim relief provided they do not breach the 30% limit.
Practical advice
- Structure share issues to keep investor holdings at or below 30% where possible
- Be aware of dilution and anti-dilution provisions that could affect percentages
- Consider the impact of convertible loan notes that may convert to shares
- Get professional advice if your shareholding is near the 30% boundary
Source: HMRC VCM10530 - Connected Persons
Real-World Examples
Spouse's Shareholding
John invests in his wife's company through EIS. He owns 5% of the shares, and his wife owns 26%. Together, they exceed the 30% threshold, disqualifying John from claiming EIS relief. HMRC considers spouses as 'associates' when determining connected person status.
Combined Investments
Sarah, David, and Emily invest in a startup. Sarah buys 15% of the shares, David buys 10%, and Emily buys 8%. Later, David and Emily agree to coordinate their voting. Since they are acting together, their combined shareholding of 18% (10+8) is added to Sarah's 15%, equalling 33%, making all of them connected persons and ineligible for EIS relief.
Options to Purchase Shares
A director is granted options to purchase 20% of a company's shares. They currently hold 15% outright. Even though they haven't exercised the options, HMRC might consider the potential shareholding when assessing the 30% test, depending on the option's terms and conditions. Seek advice to confirm the tax implications.
Common Mistakes to Avoid
- Ignoring share options that, if exercised, would push your shareholding over 30%.
- Failing to account for the shareholdings of 'associates' like spouses, civil partners, parents, children, siblings, and business partners.
- Thinking that only ordinary shares count – the test also includes voting rights and rights to assets on winding up.
- Assuming that because one investment round complied with the 30% rule, subsequent rounds automatically comply; each investment needs separate assessment.
Frequently Asked Questions
What happens if I breach the 30% shareholding test *after* claiming SEIS/EIS relief?
Breaching the 30% test after you've already claimed relief can trigger a clawback of the tax relief you received. You'll need to report this to HMRC, and they'll recalculate your tax liability.
Can a trust be considered a 'connected person'?
Yes, if you or your 'associates' are beneficiaries of a trust that holds shares in the company, these shareholdings can be attributed to you for the purposes of the 30% test. The specific circumstances of the trust deed are crucial.
Does unpaid share capital count towards the 30% test?
Yes, the test considers the number of shares you own, regardless of whether you've fully paid for them. The key factor is the percentage of the total shares that those shares represent, not the amount you've invested so far.
If I gift shares to a charity, does that affect my 30% calculation?
Gifting shares does reduce your direct shareholding. However, if you retain control or influence over those shares (e.g., through a trustee position within the charity), HMRC might still consider them part of your effective shareholding for the 30% test. Seek specific advice.
Practical Tips
- Before investing, meticulously map out all existing shareholdings, voting rights, and rights to assets among yourself and your 'associates'. Document everything clearly.
- Consult with a tax advisor *before* making any investment, especially if your shareholding is close to the 30% threshold. They can perform a thorough assessment and advise on potential risks.
- Maintain accurate records of all share transactions, agreements, and communications related to your investment. This will be crucial if HMRC ever investigates your claim.
- Review your shareholding structure regularly, especially if the company issues new shares or if there are changes in your personal circumstances (e.g., marriage, divorce, or business partnerships).
Related Questions
Can directors invest in their own company via EIS?
Generally no. Directors, employees, and anyone who holds more than 30% of the company's shares (or voting rights or rights to assets) are 'connected persons' and cannot claim EIS tax relief. However, SEIS has a partial exception for directors of companies less than 2 years old.
What is the difference between SEIS and EIS?
SEIS offers 50% income tax relief on investments up to £200,000 in very early-stage companies (under 2 years, under £250k raised), while EIS offers 30% relief on up to £1 million in slightly larger companies (under 7 years, up to £5 million raised per year).
What happens if SEIS/EIS conditions are broken?
If conditions are broken within the 3-year qualifying period, investors lose their tax relief and must repay it to HMRC. The company may also face consequences including being unable to issue further SEIS/EIS-qualifying shares. The clawback affects all investors in that share issue.
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