How the Enterprise Investment Scheme could help reduce your UK tax bill

01/06/2022

If you’re a Hong Kong resident with British citizenship, you may well have an ongoing income back in the UK.

For example, you may own one or more residential properties that you rent out.

When it comes to Income Tax on UK earnings, your options are limited in terms of reducing the amount of tax you pay. Although, you should be aware that all British citizens, regardless of residency status, are entitled to the Personal Allowance – currently £12,570.

One handy way to potentially lower your tax bill that’s often overlooked by many expats is to invest in the Enterprise Investment Scheme (EIS).

You do not have to be UK resident to be eligible to invest in, and benefit from, the tax treatment of EIS. Below you can read about the EIS, how it works, and some of the pros and cons of such investments.

The Enterprise Investment Scheme is designed to encourage business investment

Governments of all colours have tried to encourage business investment in order to help drive economic growth.

Primarily this involves incentives for businesses themselves to invest. For example, in his March 2021 Budget statement, the chancellor announced an upfront super-deduction of 130% on new business investment up to the end of March 2023.

In addition to measures to incentivise corporate investment, there have long been schemes aimed at individuals, to encourage them to put money into smaller companies in the UK.

The Enterprise Investment Scheme is such a measure.

The scheme was introduced in 1994 to help small companies who are unlisted and so may struggle to raise capital from traditional sources such as share issues.

So, through the EIS, you’re effectively investing in UK businesses through a scheme that has the government seal of approval.

The big incentive for EIS investment is that you can claim 30% of your investment as tax credit. So, paying £100,000 into an EIS would give you £30,000 of Income Tax relief.

There are a variety of flexible options when it comes to EIS investment

Rather than simply investing in a company yourself, an effective process has grown up around EIS investment.

Specialist providers manage EIS investments and provide you with flexibility when it comes to your choice of which companies to invest in.

You have the choice of investing in one single company through the EIS, or putting your money into an EIS portfolio. This will mean your investment is bundled with others to maximise the capital available and so potentially enhance the chances of success.

You can select a multi-EIS option that will spread your investment across different sectors. Alternatively, you could invest in an option that focuses on one particular area of the market such as technology or healthcare.

As well as managing your investment, such specialist companies will also carry out all the due diligence and research, giving you valuable peace of mind and saving you a lot of time and effort.

One important factor to bear in mind here, is that these specialist companies themselves are also likely to invest in the same opportunity they are offering, so will have “skin in the game” and a direct interest in the schemes in question plus a professional approach to pursuing an exit.

6 advantages of investing in the EIS

As well as support from intermediary companies to streamline the investment process, there are several other advantages of EIS investment. These include:

  1. The maximum total EIS investment is £1 million in each tax year, resulting in £300,000 Income Tax relief. This can be invested in one single scheme, or across several.
  2. EIS are a well-established investment option and have been available for nearly 30 years.
  3. All EIS investment returns are free of tax, so your Capital Gains Tax (CGT) allowance isn’t affected.
  4. After you’ve held an EIS investment for two years it sits outside the value of your estate for Inheritance Tax (IHT) purposes.
  5. You can claim loss relief on your EIS at your marginal rate of tax.
  1. You have the option to “carry back” your EIS holding so the tax relief can be set against income in the previous tax year.

The EIS is a highly speculative investment

The key point when it comes to an EIS investment is that it’s very much at the “speculative” end of the risk spectrum.

Global start-up funding specialists, Fundsquire report that 20% of new businesses fail in the first year with that figure rising to 60% in the first three years.

So, the chances of you losing some, or all, of your investment can be high – although it’s worth remembering that the tax credit effectively limits your losses to 70% of your initial outlay.

As an illiquid investment, the EIS is not suitable if you want instant access

The EIS also has to be seen as an illiquid investment. Your money is likely to be tied up for at least five years.

It’s then down to the EIS manager to put together an exit strategy to enable the company to return your capital outlay and any tax-free growth.

One other final point to note is that you’ll only be eligible to claim tax relief on your investment once your shares have been purchased. This can take up to 24 months from the date of investment, though you can carry back your investment to the previous tax year.

Get in touch

If you’d like to find out more about the Enterprise Investment Scheme, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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