What is the risk-to-capital condition?
By SuLe · Updated 26 May 2026
The risk-to-capital condition is a gateway test, introduced by the Finance Act 2018, that every SEIS or EIS investment must pass: the company must have objectives to grow and develop long-term, and the investment must carry a significant risk that the investor loses more capital than the net return. It is designed to keep the reliefs for genuine growth businesses rather than capital-preservation schemes.
Key facts
- Introduced by the Finance Act 2018; it applies to SEIS and EIS investments.
- Limb one: the company must have objectives to grow and develop over the long term.
- Limb two: the investment must carry a significant risk of loss of capital exceeding the net return.
- Pre-arranged exits and capital protection arrangements are barred under the schemes.
Why does the risk-to-capital condition exist?
To stop the reliefs subsidising safety. SEIS and EIS exist to push private money into risky, growing companies, and before the Finance Act 2018 introduced this condition, structures had grown up that captured the tax relief while quietly protecting the investor's capital.
The condition works as a gateway: however neatly a raise satisfies the detailed rules on size, age and trade, it still fails if the arrangement as a whole lacks growth ambition or genuine risk.
For an ordinary startup raising equity to build a product and a team, it is usually straightforward to meet — but it has to be evidenced, not assumed.
What counts as objectives to grow and develop long-term?
Ambition you can point to. The first limb asks whether the company intends to become a bigger business over time — more revenue, more people, a larger market — rather than to hold assets or tick over at a steady state.
The evidence is your business plan and forecasts, usually presented to HMRC at the advance assurance stage: what the money buys, who you will hire, how the product and market expand.
A company set up to complete a single project and return the proceeds, or to sit on income-producing assets, is unlikely to show long-term growth and development objectives — however profitable it might be.
What does significant risk to capital mean?
The second limb requires a real prospect that the investor ends up down on the deal: a significant risk of losing more capital than the net return the investment offers.
This is why the schemes' share requirements are so strict. The shares must be full-risk ordinary shares with no preferential rights to assets on a winding up, and pre-arranged exits and capital protection arrangements are barred — a guaranteed buy-back or secured return strips out exactly the risk this limb demands.
If your raise involves anything that softens the downside for investors, treat it as a red flag and take advice before applying.
How does HMRC test the condition in practice?
Most companies first meet it at advance assurance: the application sets out your plans for the money and your expected investors, and HMRC forms a view on the whole arrangement — the condition is principles-based, not a checklist.
Spending plans help tell the story. SEIS money must be spent on the qualifying trade within 3 years and EIS money employed within 2, so an application showing the cash going into hiring and product supports both limbs at once.
Be honest about borderline cases: the test is judgement-based, and where a structure sits near the line, the answer genuinely depends on the facts — that is precisely when to involve an adviser.
| Limb | What HMRC is asking | What founders point to |
|---|---|---|
| Growth and development | Does the company aim to grow and develop over the long term? | Business plan and forecasts: hiring, product roadmap, market expansion |
| Risk to capital | Could the investor lose more capital than the net return? | Full-risk ordinary shares, no guaranteed exit, no capital protection, money spent on the trade |
Worked example
Rachel is raising £150,000 under SEIS for her route-optimisation software startup. Her plan shows the money hiring three engineers and launching in two new cities within 18 months — clear growth and development objectives. Her lead angel subscribes £60,000 for new full-risk ordinary shares: he gets £30,000 of income tax relief, and the rest rides entirely on the company succeeding. Both limbs are satisfied.
Contrast the scheme an acquaintance pitches her: investors fund a company that buys serviced apartments, collects rent and promises a buy-back after four years. There is no long-term growth objective and the buy-back is a pre-arranged exit — it fails the condition before any other rule is even reached.
Where founders go wrong
Pitching HMRC a safe investment
— safety is the enemy here: guaranteed returns, buy-backs and capital protection defeat the condition, and pre-arranged exits are barred outright.Writing a business plan with no growth in it
— the first limb needs long-term growth and development objectives; a steady-state plan undermines your own application.Structuring around assets
— if the money's real job is to sit in something that preserves its value, expect HMRC to push back under this condition.Treating advance assurance as a rubber stamp
— the condition is judgement-based and borderline arrangements genuinely fail; assurance is non-statutory pre-clearance, not an entitlement.
Related questions
Does the risk-to-capital condition apply to SEIS as well as EIS?
Yes. The condition was introduced by the Finance Act 2018 and applies whether you are raising under SEIS or EIS, so every investment must pass it. HMRC will expect to see long-term growth objectives and genuine risk whichever scheme your advance assurance application covers. [More: SEIS vs EIS — what's the difference?]
What is a pre-arranged exit?
Any arrangement agreed around the investment that gives the investor a mapped-out route to their money back — a guaranteed buy-back, a planned sale, capital protection or similar. The schemes bar pre-arranged exits and capital protection arrangements outright, because they remove the risk the relief is meant to reward.
How do I evidence growth objectives to HMRC?
Through your advance assurance application: a business plan and forecasts showing how the money will be spent on growing the trade — hiring, product, market expansion — plus details of your expected investors. A plan that reads as asset-holding or steady-state trading undermines the application. [More: How do I get SEIS/EIS advance assurance?]
Can my company lose SEIS or EIS status later, even if it passes this test?
Yes. Within 3 years of the issue, status can be lost by ceasing the qualifying trade, excluded activities becoming substantial, the company being acquired, repaying share capital or an investor receiving value. The risk-to-capital condition is the gateway; the ongoing rules are the fence. [More: Can my company lose SEIS/EIS status after the investment?]
The risk-to-capital condition is the one SEIS/EIS test with no bright-line numbers, which makes it the easiest to fail by accident — a well-meant investor protection clause or a cautious business plan can sink an otherwise perfect raise. A SuLe solicitor can review your structure and application through HMRC's eyes first. Book a free SEIS/EIS readiness call before anything goes to HMRC.
Keep reading: What is SEIS and how does it work? · What is EIS and how does it work? · Is my startup eligible for SEIS? · How do I get SEIS/EIS advance assurance? · Which trades are excluded from SEIS and EIS? · Can my company lose SEIS/EIS status after the investment?
Primary sources: HMRC — Apply for advance assurance on a venture capital scheme · HMRC — Apply to use the Seed Enterprise Investment Scheme · HMRC — Apply to use the Enterprise Investment Scheme
