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Take the bridge money on a convertible note and your investors lose their SEIS relief

By Buzz Accounting · 2026-08-19

You need money before the round. An existing angel is willing. Somebody sends over a convertible loan note template because it is the instrument everyone has heard of, it takes a week instead of six, and it defers the valuation argument to a day when you have more leverage.

All of that is true. What the template does not say is that a convertible loan note is debt, that SEIS and EIS relief attaches only to shares, and that the angel who signs it has just given up either 50p or 30p in the pound of income tax relief they almost certainly assumed they were getting. That conversation, when it happens, happens after the money has moved.

The instrument that does the same job without destroying the relief is an advance subscription agreement. It is more restrictive than a note, deliberately so, and the restrictions are the whole point.

Why a convertible note cannot carry SEIS or EIS

Both schemes give relief on shares subscribed for wholly in cash and fully paid up when they are issued. A convertible loan note fails that test twice over. The investor pays cash for a debt instrument, not for shares. When conversion comes, the shares are issued in satisfaction of an outstanding loan rather than subscribed for in cash.

There is a second, more fundamental objection. Both schemes exist to reward capital that is genuinely at risk. A note that pays interest and is repayable if the round does not happen has removed most of that risk, which is exactly why founders like it and exactly why HMRC will not give relief on it.

The five conditions an ASA has to meet

HMRC's guidance sits at VCM33025 for SEIS and VCM12025 for EIS, and it is unusually blunt. An advance subscription agreement will only be accepted as a subscription for shares if it:

Cannot be refunded in any circumstances. Not on insolvency, not if the round falls over, not by agreement. Once the money is in, the only way out is shares.
Cannot be varied, cancelled or assigned. A side letter agreeing to extend the longstop date has voided the relief on the whole agreement.
Bears no interest. None, in any form, including a payment dressed up as a fee.
Carries no investor protections. No security, no ranking ahead of anyone, no guaranteed minimum return, no most-favoured-nation clause that behaves like one.
Has a longstop date no more than six months away. HMRC's stated expectation, and the condition founders trip over most often, because a six-month runway on a bridge is tight and the temptation to write nine months into the document is considerable.

Miss one and the money is treated as a loan. The investor gets no relief, and there is no retrospective fix once the agreement is signed.

What that is worth, in pounds

The figures below are illustrative, for a company raising a £150,000 bridge ahead of a priced seed round, with an angel putting in £40,000 at a 20% discount to the round price. The angel is an additional-rate taxpayer.

Under an SEIS-compatible ASA. The angel subscribes £40,000. When the round completes, shares are issued at a 20% discount and SEIS relief runs from the date of issue. Income tax relief at 50% is £20,000, so the stake costs £20,000 net. If the company later fails and the shares become worthless, loss relief is available on the net cost against income at the angel's marginal rate: 45% of £20,000 is £9,000, cutting the worst case to £11,000 of real money. On a successful exit, the gain is free of capital gains tax provided the shares are held for three years.

Under a convertible loan note. The angel lends £40,000, typically at 6% to 8%. There is no income tax relief, no capital gains exemption, no loss relief against income, and the interest is taxable income when it is paid or converted. The stake costs £40,000. The relief given up is £20,000 — half the cheque — and on a £150,000 bridge raised entirely on notes, £75,000 of relief across the investor group.

The bill nobody budgets for: CT61

There is a cost to the company as well, and it is routinely missed. Interest on a loan note that runs, or is capable of running, for more than twelve months is yearly interest. A UK company paying yearly interest to an individual must deduct income tax at 20% at source, report it on a form CT61, and pay it to HMRC within 14 days of the end of the quarter.

On £150,000 of notes at 7% for eighteen months, that is £15,750 of interest and £3,150 of tax the company has to find and hand over — frequently at the moment of conversion, when the interest is rolled into shares and no cash changes hands at all. A pre-revenue company writing a real cheque for tax on interest it never actually paid is a bad month, and it is entirely avoidable.

The limits the ASA is buying you access to

For SEIS in 2026/27: a £250,000 lifetime limit for the company, £200,000 a year per investor, gross assets no more than £350,000 immediately before the share issue, fewer than 25 full-time equivalent employees, and the trade under three years old at issue.

For EIS, the ceilings doubled on 6 April 2026: £10m in any rolling twelve months and £24m over the company's life, with gross assets up to £30m before the investment and £35m after, fewer than 250 employees, and the trade under seven years old. Our post on SEIS and EIS for founders covers the qualifying conditions in full, and the SEIS vs EIS comparison sets the two side by side.

Sequence matters, and an ASA can break it

SEIS shares have to be issued before any EIS shares in the same company. Issue EIS shares first and the SEIS allocation is lost permanently — there is no way to unwind it.

An ASA makes this easy to get wrong, because the money arrives months before the shares exist. If part of the bridge is intended to be SEIS and the priced round will be EIS, both sets of shares are issued on the same day at completion, and the board minutes and the register of members have to show the SEIS allotment happening first. Getting the order of two paragraphs wrong in a minute book is a genuinely expensive way to lose £125,000 of investor relief.

When a note is still the right instrument

An ASA is not a universally better document. Take the note where:

The investor is a fund or a corporate that gets no personal income tax relief and wants downside protection instead.
The investor is not UK resident and has no UK income tax to relieve.
The company has already used its full SEIS allocation and exceeded the EIS conditions, so there is no relief on the table.
You genuinely cannot commit to issuing shares within six months — in which case a note is honest and an ASA with a nine-month longstop is a relief-destroying pretence.

What to do this week

Read the document you have actually been sent. If the words interest, repayment, redemption, security or assignment appear anywhere in it, it is a loan note whatever the header says.
Fix the longstop date at six months or fewer, and be realistic about whether the round closes by then. Missing it means issuing shares at the pre-agreed floor price, not extending.
Apply for advance assurance before the agreement is signed, not after. HMRC will look at the ASA itself, and afterwards is too late to change a term it objects to.
Agree the discount now. Ten to twenty per cent is ordinary. A discount so large that it functions as a guaranteed return invites HMRC to treat the arrangement as protection rather than risk.
Write the completion mechanics into the agreement: SEIS shares allotted first, EIS second, on separate resolutions, with the register updated in that order.
If notes are already in issue, work out the CT61 position before conversion, so the withholding tax is in the cashflow rather than in a letter. Our startup funding guide covers where a bridge sits in the wider funding path.
Tell your investors which instrument they are signing and what it means for their relief. Finding out later is the version that costs you the follow-on cheque.

Where we help

We handle SEIS and EIS advance assurance applications, review the ASA before it is signed rather than after, run the compliance statements that let investors actually claim, and keep the share issue sequence straight so the SEIS allocation survives the round. We also deal with the CT61 side where legacy notes are converting. Banded fixed fees from £49 + VAT a month. Get started.

Quick answers

About this post

Can investors claim SEIS or EIS relief on a convertible loan note?

No. Both schemes give relief only on shares subscribed for wholly in cash and fully paid up when issued, and a convertible loan note fails that on both counts: the investor buys a debt instrument, and the shares are later issued in satisfaction of a loan rather than subscribed for in cash. The underlying reason is that the schemes reward capital genuinely at risk, and a note bearing interest and repayable if no round happens has removed most of that risk. The SEIS-compatible alternative is an advance subscription agreement, which cannot be repaid and cannot bear interest.

What is the maximum longstop date on an advance subscription agreement?

Six months from the date of the agreement. HMRC's published expectation is that the longstop will be no longer than that, and a longer window is the single most common reason an ASA is rejected for SEIS or EIS purposes. It is also the condition founders are most tempted to bend, because a bridge is often intended to last longer than six months. Bending it does not buy time; it converts the whole agreement into a loan for tax purposes. If the round genuinely cannot close within six months, use a loan note deliberately rather than an ASA that will fail.

Can an advance subscription agreement pay interest or be repaid?

Neither, under any circumstances. HMRC requires that the subscription cannot be refunded in any situation, including insolvency or the round falling through, and that the agreement bears no interest in any form, including arrangement fees that function as a return. It also cannot be varied, cancelled or assigned, and cannot carry investor protections such as security or a guaranteed minimum. Those terms feel harsh to an investor used to notes, and they are the price of the relief: what makes an ASA qualify is precisely that the money is exposed to full equity risk from the day it lands.

When does the three-year SEIS holding period start?

On the date the shares are issued, not the date the money arrived. That gap can be several months under an advance subscription agreement, and it matters in two ways. Relief is claimed for the tax year in which the shares are issued, so an investor budgeting relief against a particular year's income tax needs the allotment to fall inside it. And the three-year holding period that protects both the income tax relief and the capital gains exemption runs from issue, so a sale a few weeks early can claw back relief already given. Diarise the issue date, not the transfer date.

Do we need advance assurance before signing an ASA?

You should apply before signing rather than after. HMRC will review the advance subscription agreement itself as part of the application, and if it objects to a term there is nothing to be done once investors have signed and paid. Advance assurance is not a legal requirement and it is not binding, but most UK angels treat it as a precondition for putting money in, so in practice it is close to mandatory for a first raise. Allow several weeks for a response and build that into the timetable rather than treating it as a formality alongside completion.

What discount is normal on an advance subscription agreement?

Ten to twenty per cent against the price of the funding round is the ordinary range, with the discount reflecting the risk of investing before terms are known. HMRC has not published a ceiling, but the test it applies is whether the investor is genuinely exposed to equity risk. A discount so generous that it operates as a guaranteed return, or a valuation floor set so low that the investor cannot lose, invites the same objection as an interest coupon. Agree the discount and any valuation cap at the outset, because the agreement cannot be varied later without destroying the relief.

What happens if the funding round does not happen before the longstop date?

The shares are issued anyway, at the pre-agreed longstop valuation written into the agreement. That is the whole mechanism: because the money can never be repaid, the longstop is not a deadline for a decision but a date on which the company must allot shares. Founders should therefore treat the longstop price as a real valuation they may actually have to accept, rather than a theoretical backstop. Extending the date instead, or agreeing with the investor to leave the money outstanding, voids the relief for everyone in the agreement, so the mechanic has to be honoured.

Does the company have to file a CT61 on convertible note interest?

Yes, where the interest is yearly interest, which means an obligation capable of running for more than twelve months. The company must deduct income tax at 20% from interest paid to an individual, report it on form CT61 and pay it to HMRC within 14 days of the end of the quarter. The problem case is conversion, where accrued interest is settled in shares and no cash moves: the company still owes the withholding tax in cash. On £150,000 of notes at 7% over eighteen months that is £3,150 to find at exactly the wrong moment.

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