Loans and S/EIS relief interact in ways that can easily trip up founders and investors. Here are four common scenarios and how each one plays out.
Scenario 1: Investor loans £60,000 and plans to convert it into equity
This arrangement is not eligible for SEIS or EIS relief.
When shares are issued in consideration for the cancellation of a loan - sometimes called "converting loan stock" - no new money actually enters the company. The issue of shares in consideration for the liquidation of a loan, or by the conversion of loan stock, does not raise money for the company. Because the shares aren't issued for a qualifying business activity, the transaction fails the qualifying conditions for relief. HMRC's position is set out in VCM33030.
Scenario 2: A third-party / founder loans £60,000 and plans to repay it using SEIS funds
This can be permissible under SEIS but only if the loan is unconnected to the SEIS investor. HMRC only permits loan repayment terms to be agreed in SEIS-qualified rounds, not EIS. The company can repay third-party loans using SEIS investment provided the loan was not from or linked to the investor themselves, and was used for the purposes of the trade. The relevant test is the "spending of the money raised" requirement in VCM33040).
The Gannons case illustrates the boundary: the company could not use SEIS funds to repay the loan to its own investor, but could use funds from other third parties not investing under SEIS to do so.
Key conditions for SEIS loan repayment:
- The loan must not be from or linked to the SEIS investor
- The original loan must have been used for the purposes of the trade
- The repayment must be disclosed to HMRC in the advance assurance application
Scenario 3: A third-party / founder loans £60,000 and plans to repay it using EIS funds\
This is not permitted under EIS.
The money raised under EIS must not be used to repay any outstanding loan balance - HMRC treats this as a prohibited "recycling" of funds. Unlike SEIS, the EIS “employing” requirement (see VCM12060) requires that money raised be actively employed in the trade; repaying a loan does not meet this standard. See this guide from Barnes & Scott accountants.
Scenario 4: A third-party / founder loans £60,000 and plans to repay it from trading profits
This is the safest approach and carries no SEIS/EIS risk.
Repaying a founder or director loan from company revenue - entirely separately from any SEIS or EIS fundraise - does not interact with the relief conditions at all. The SEIS/EIS rules are concerned with how investment proceeds are spent, not with how ordinary trading profits are applied. If this is your intended route, there is nothing to worry about.
