What are EIS and SEIS?
Both schemes were created by the UK government to encourage investment into early-stage British businesses. The idea is straightforward: smaller companies find it hard to raise money, and investors taking a risk on them deserve a reward for doing so. The government provides that reward in the form of tax relief.
SEIS is aimed at the very earliest-stage companies, new start-ups that have been trading for less than three years, with fewer than 25 employees and gross assets of no more than £350,000, and offers the higher rate of relief to reflect the greater risk involved. EIS covers a slightly broader range of companies at a somewhat later stage of development, with gross assets of up to £30 million and fewer than 250 employees, and offers a lower but still very generous rate.
In both cases, the company must be unquoted, UK-incorporated, and carrying on a qualifying trade; HMRC confirms this in its Venture Capital Schemes Manual, VCM13050.
What relief is actually available?
The numbers are worth setting out clearly because they are genuinely substantial. Under SEIS, an investor can claim income tax relief of 50% on investments of up to £200,000 per tax year.
That means a £20,000 investment in a qualifying SEIS company reduces your UK income tax bill by £10,000. Under EIS, the rate is 30% on investments of up to £1 million per year, or up to £2 million where the additional amount is invested in knowledge-intensive companies, meaning a £100,000 EIS investment in a qualifying company reduces your tax bill by £30,000.
These reliefs are set out in Income Tax Act 2007, Part 5 for EIS and in the provisions introduced by Finance Act 2012 for SEIS, and they apply directly against your income tax liability for the year of investment, with the option in some cases to carry the relief back to the previous tax year.
Beyond the income tax relief, if you hold your shares for at least three years and the company continues to meet the qualifying conditions, any gain on disposal of those shares is entirely exempt from capital gains tax. And if the investment does not work out, which is always a real possibility with early-stage companies, loss relief is available, meaning you can offset the loss against either income or capital gains, which softens the blow considerably.
How this is relevant to expats specifically
This is where it becomes particularly interesting for people in an international situation, because EIS and SEIS income tax relief is not restricted to UK residents. The relief is available to anyone with a UK income tax liability, and there are more expats in that position than you might think.
Consider someone living in Dubai who kept their UK flat and rents it out. They pay UK income tax on that rental profit every year through a UK self-assessment return. If they were to invest in a qualifying EIS or SEIS company, and there are specialist funds and platforms that make this accessible by pooling investor money across a portfolio of qualifying companies, thereby spreading the risk, that investment could generate income tax relief directly against their UK rental tax liability. A £40,000 investment in a qualifying SEIS company, for example, could generate £20,000 of income tax relief.
The position is equally relevant, and in some ways more so, for expats who have not made a clean break from UK residence. Under the Statutory Residence Test, introduced by Finance Act 2013, leaving the UK does not automatically end UK residence. If you are still a UK resident under that test, perhaps because you are spending more days in the UK than you realised, or because you retain ties that keep you within the scope of the rules, you are a UK taxpayer on your worldwide income. That can feel like an unwelcome discovery. What many people in this position do not realise is that it also opens the door to the full range of EIS and SEIS reliefs, including CGT deferral relief on gains made on disposals of other assets, where the proceeds are reinvested into qualifying EIS shares. A tax liability you did not expect can, with the right advice and a suitable qualifying investment, be meaningfully reduced.
For those who are planning to return to the UK, EIS and SEIS are also worth considering from day one of UK residence. High earners arriving in the UK face an immediate UK income tax liability on their worldwide income, and a well-timed investment in a qualifying EIS or SEIS company in the first tax year of residence can significantly reduce the bill.
One important warning before you act
EIS has one feature expats planning to leave the UK need to be aware of. If you invested in a qualifying EIS company while UK resident and used the scheme to defer a capital gain on another asset, that deferred gain does not disappear when you leave the UK; it can come back into charge at the point you cease to be UK resident. Understanding exactly when UK residence ends under the Statutory Residence Test is therefore critical for anyone holding EIS shares with a deferred gain. This is precisely the kind of interaction between investment decisions and residence status where taking specialist advice before making any move is strongly recommended.
Could EIS or SEIS work for you?
If you are paying UK tax from abroad, whether on rental income, employment income, or because your residence position is more complicated than you assumed, and you have never explored whether an investment in a qualifying EIS or SEIS company could reduce that liability, it is a conversation worth having sooner rather than later.
At Hodgens Global, we work with expats at every stage of their international journey, and helping clients understand what is available to them, not just what they owe, is central to what we do.
Paying UK tax from abroad and not sure what reliefs are available to you? Get in touch, and we will give you a clear picture of where you stand.
