Great questions, and wise not to oversell the relief before the conditions are in place. Here is how it works in practice.
What your friend gets as an investor
The investor claims relief through Self Assessment, but only after your company gives them an SEIS3/EIS3 compliance certificate (more on the process below). The key reliefs, per HMRC's current venture capital guidance:
SEIS (Seed Enterprise Investment Scheme): 50% income tax relief on the amount invested, up to GBP 200,000 per tax year. On a GBP 20,000 investment, that is GBP 10,000 off their income tax bill. The shares must be held at least 3 years. Gains on disposal are exempt from CGT if held at least 3 years and income tax relief has not been withdrawn. There is also SEIS reinvestment relief: if they invest a previous capital gain into SEIS shares, 50% of that gain (on up to GBP 200,000 of investment) is exempt from CGT. If the investment loses value, loss relief is available against income.
EIS (Enterprise Investment Scheme): 30% income tax relief, up to GBP 1 million per tax year (GBP 2 million where at least GBP 1 million is in knowledge-intensive companies). On GBP 20,000, that is GBP 6,000 of income tax relief. CGT on disposal is exempt after 3 years, gains can be deferred by reinvesting (100% of the gain), and loss relief is available too.
One important restriction: the investor cannot be "connected" with your company. Broadly, they and their close associates must not hold more than 30% of your shares, voting rights or assets on a winding up. For EIS they also cannot be an employee (an unpaid director is acceptable, and directors can invest under SEIS). A genuine friend investing at arm's length is normally fine, as long as these tests are met.
Which scheme fits your company?
SEIS: for very early stage companies. The company must be within its first 3 years of trading (from first commercial sale), have gross assets of no more than GBP 350,000, have fewer than 25 full-time equivalent employees, and must not have raised EIS investment before. Maximum SEIS raise: GBP 250,000 in total.
EIS: the next step up. Investment must be within 7 years of first commercial sale, fewer than 250 employees, and gross assets within HMRC's limits; most companies can raise up to GBP 10 million in any 12-month period and GBP 24 million in total across the venture capital schemes.
At 18 months of trading with no outside money raised, your company looks like a textbook SEIS candidate, and your friend gets the more generous 50% income tax relief.
Process and timing (the part founders get wrong)
1. Apply for advance assurance first, before the shares are issued. You send your business plan, accounts and share details to HMRC so they can confirm the share issue is likely to qualify. It is not a guarantee, but investors quite rightly ask for it.
2. Issue full-risk ordinary shares, paid up in cash. No buy-back agreements, no downside guarantees, no redeemable shares or arrangements to protect the investor - all of these destroy the relief.
3. Run the business: for SEIS you must have carried on the trade for at least 4 months and spent at least 70% of the amount raised before you can file the compliance statement.
4. Submit the compliance statement (SEIS1 or EIS1) to HMRC. If accepted, they send you the SEIS3/EIS3 certificates.
5. Give the certificates to your investor, who then claims relief on their tax return.
Practical pointers: get advice before the money comes in, because the share terms and the order of events really matter. Never promise relief until HMRC has accepted the compliance statement. And take no EIS money first if you want to use SEIS - once a company has raised under EIS, SEIS is off the table.
Figures above are from HMRC's current venture capital schemes guidance, last updated April 2026. Rules do change, so always check the latest guidance before proceeding.
