Expats are often put off ploughing their savings into start-up investment schemes backed by the government to tap into some lucrative tax breaks.
Many are disappointed because the rules bar them from taking a slice of the action.
But many expats can still take advantage of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) when they realise tax relief is on offer, providing they meet some strict conditions.
Here, we explain how EIS and SEIS tax relief works for expats
What are EIS and SEIS?
Both EIS and SEIS are government-backed tax incentivised investments.
The jargon means that to benefit from the tax breaks, investors can only stake their cash against companies approved by HM Revenue & Customs.
EIS is a well-established investment package that has see nearly 32,000 companies raise £22 billion for start-ups and growing businesses since April 1993.
SEIS is a younger package that has helped more than 12,000 start-ups with more than £1 billion of investment since April 2012.
What are the investment rules for expats?
If an expat can invest depends on two factors – tax residence and if they pay income tax.
The first rule of EIS and SEIS is if you pay don’t pay income tax, you can’t claim any tax relief.
The second rule is you must be UK tax resident to take part in either package.
That immediately strikes out a huge number of expats who live permanently overseas.
But the rules leave thousands of expats abroad on temporary assignments who are still considered UK resident for tax.
Tax residence rules are complicated. The best way to determine tax status is to run through the Statutory Residence Test.
Expat is not a term tax law recognises – it’s all about where your main home is, where you pay your taxes and how much time you spend there.
What’s the difference between EIS and SEIS?
There’s not a lot of difference between how EIS and SEIS run other than the amount you can invest, and the rate of tax relief applied.
SEIS is considered riskier as the companies asking for funding are start-ups with little or no trading history. To reflect this, the investment amount is lower, and more tax relief is offered.
Although many EIS companies are start-ups, investors also have an opportunity to buy shares in larger, growing companies that have established a short trading history.
The best way to view the differences between EIS and SEIS is to compare them side-by-side:
|Annual investment||£100,000||£1m (Up to £2m for knowledge businesses)|
|Income tax relief||50%||30%|
|Investment tie-in||36 months|
|Capital Gains Tax relief on share disposal at end of tie-in||Yes|
|Inheritance Tax Relief||Yes|
How SEIS works for expats
Once you have established eligibility as an expat under the Statutory Residence Test, you can invest up to £100,000 in SEIS in each tax year.
The investment limit ticks back to zero each April 6 and the tax year runs until the following April 5.
Investments are by directly buying company shares or through a fund that spreads the investment across several companies.
SEIS tax breaks for expats are the main attraction, especially if you have maxed out your annual pension contribution allowance and are looking for a tax-efficient way to make further savings.
Every pound invested comes with a 50p reduction on income tax paid in the year.
For example, an expat invests £80,000 in SEIS.
- If the income tax due is £40,000, the tax relief is 50% of the amount invested, which is £40,000. The tax relief wipes out the income tax due for the year.
- If the income tax due is £60,000, the £40,000 relief would leave £20,000 left to pay.
- If the tax bill is £20,000, the tax relief due would be £20,000 and any remaining relief is lost
Bear in mind 50% tax relief only applies if you keep the SEIS shares for 36 months. HMRC can and will claw back the relief if the shares are cashed in early unless the investment fails, and loss relief applies.
If the investment runs for the 36 month term, the sale of SEIS shares is free of capital gains tax.
Should the investment fail, loss relief applies.
For our expat’s £80,000 investment, this would mean the loss is £40,000, calculated as the original investment less income tax relief (£80,000 – £40,000). The loss is then set off against any income tax due. If the loss is more than the expat’s tax bill, the excess loss relief can’t be claimed.
- If the expat has a tax bill of £40,000 or less, the full amount is offset by loss relief, but any unused relief is not carried forward.
- If the tax bill is more than £40,000, loss relief covers the first £40,000 of any tax due leaving a balance to be paid.
SEIS comes with two more key tax reliefs:
- Capital Gains Reinvestment Relief – This allows investors to sell other assets and reinvest 50% of any CGT paid on the disposal free of tax.
- Inheritance Business Property Relief – This relief places any SEIS investment outside the deceased’s estate for IHT.
How EIS works for expats
EIS works in the same way as SEIS for expats with different rates and limits on tax relief.
The inbound income tax relief for EIS is set at 30% instead of 50% but applies to investments of up to £1 million.
In the case of knowledge companies, the annual investment is capped at £2 million.
EIS also has loss relief, the same CGT relief on the sale of shares and IHT relief but does not offer Capital Gains Reinvestment Relief.
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