EIS and SEIS give UK income tax relief and a CGT-free exit. US tax is computed as if none of it existed, often with no credit to absorb it. The mechanism, and the PFIC test stated precisely.
A US citizen or green card holder living in the UK can claim EIS and SEIS relief in the ordinary way, but the United States recognises neither scheme. The IRS computes your income, gains and losses as though the reliefs did not exist, and because EIS and SEIS work by removing UK tax, there is often no foreign tax credit left to set against the resulting US charge. One investment, a real UK saving and a real US liability — and the US side is rarely modelled before the subscription form is signed.
Under EIS, you can claim income tax relief at 30% of the amount subscribed for new shares, on up to £1 million a tax year — or £2 million where at least £1 million goes into knowledge-intensive companies. The relief reduces your UK tax liability rather than your income, cannot exceed the tax you owe, and cannot be carried forward, though a claim can be treated as made in the previous year.
EIS also offers capital gains deferral relief: reinvest a gain from the sale of any asset into qualifying EIS shares and tax on that gain is deferred, not cancelled. The investment must fall between one calendar year before and three calendar years after the disposal. The deferred gain returns to charge when you dispose of the shares, when the investment is cancelled or repaid, when the company stops qualifying — or, importantly for mobile Americans, when you become non-resident.
Hold the shares at least three years with relief intact and any gain on disposal is exempt from UK capital gains tax. Sell at a loss and you can set that loss, reduced by the relief already given, against your income for the year of sale or the year before.
SEIS targets earlier-stage companies and is more generous: 50% relief on up to £200,000 a year. It offers reinvestment relief rather than deferral — capital gains relief on 50% of the investment, up to £200,000 invested, so a maximum of £100,000 of gain permanently exempted. You must also obtain income tax relief on the same investment, and any asset you have sold must be sold in the same tax year as that claim. Otherwise the pattern matches EIS.
This distinction decides most of the US analysis. A Venture Capital Trust is a company: you buy shares in a listed investment company which then invests in trading companies, so for US purposes you own stock in a foreign corporation whose income and assets are overwhelmingly passive — which is why a VCT is very likely a PFIC. We cover that separately in the VCT PFIC trap.
With EIS and SEIS you subscribe for shares in the trading company itself. Even through an approved EIS knowledge-intensive fund the mechanics confirm it: EIS3 certificates are issued by the underlying companies to the fund manager, who sends you form EIS5 to claim. You beneficially own shares in real businesses, so the PFIC question is tested at that level rather than failed automatically at a wrapper.
Two other differences matter: VCT dividends are free of UK income tax, while EIS and SEIS give no relief on dividends at all, and a VCT needs five years against three. For the company's side of these schemes, see our guide to raising investment under SEIS and EIS.
The US taxes citizens and green card holders on worldwide income, and no US deduction, credit or exclusion corresponds to EIS or SEIS relief. For US purposes you have simply bought stock in a foreign corporation: basis is cost in dollars, and the UK relief is invisible. Nor is there a domestic analogue to fall back on — the qualified small business stock exclusion under section 1202 requires a domestic C corporation, as the IRS Schedule D instructions confirm.
A foreign tax credit requires a foreign income tax imposed on you that you paid or accrued, capped at the US tax on your foreign-source income in that category; IRS Publication 514 sets out the requirements, with unused credits carried back one year and forward ten.
EIS and SEIS relief works by reducing UK tax. A £30,000 EIS reduction does not reduce UK tax on any particular item of income — it reduces your overall liability, and that liability is exactly the pool of creditable tax you were going to use against US tax on your UK earnings. Claim the relief and the pool shrinks; the US tax does not. Where the pool was already tight, the UK saving can be handed straight to the IRS. Our note on foreign tax credit carryovers explains what happens to credits you cannot use.
On exit it is starker. The UK charges nothing on a qualifying disposal, so there is no foreign tax to credit. And Publication 514 adds a sourcing rule with teeth: a US citizen with a foreign tax home is treated as a non-resident for a sale of personal property only if an income tax of at least 10% of the gain is paid to a foreign country. A UK-exempt gain pays 0%, so the seller stays a "US resident" for sourcing, the gain is US-source, and it cannot be placed in a credit basket at all — even if spare credits sit elsewhere.
| Relief | UK treatment | US treatment | Net effect for a US person |
|---|---|---|---|
| EIS income tax relief | 30%, up to £1m (£2m with ≥£1m in knowledge-intensive companies) | No equivalent; basis is cost in USD | Real saving, but it shrinks the UK tax available as a credit |
| SEIS income tax relief | 50%, up to £200,000 | No equivalent | Same mechanism, larger saving and larger credit erosion |
| EIS CGT deferral relief | Gain on another asset deferred, no cap | Original gain taxed when realised | US tax now, UK tax later or never |
| SEIS reinvestment relief | 50% of investment exempted, max £100,000 of gain | Original gain fully taxable | US tax on a gain the UK has permanently exempted |
| CGT exemption after 3 years | None, where relief received and retained | Full gain at 0%, 15% or 20%, plus 3.8% NIIT above thresholds | Largest exposure: no UK tax, no credit, gain is US-source |
| Loss relief | Loss, less relief given, against income for the year of sale or the year before | Capital loss; only $3,000 of other income a year | UK relief is fast and against income; US relief is slow and capital |
| Dividends | No relief under either scheme | Taxable under ordinary rules | Taxed on both sides |
Overstating this is as unhelpful as ignoring it. A foreign corporation is a PFIC if it meets either of two tests, per the Form 8621 instructions. The income test: 75% or more of gross income for the year is passive. The asset test: at least 50% of the average percentage of assets held during the year produce or are held to produce passive income.
A genuine trading company earning revenue from software, services or goods will normally fail both tests, so it will not be a PFIC, and the EIS and SEIS qualifying-trade conditions push the same way.
But status is retested every year, and early-stage companies have one recurring vulnerability: a pre-revenue company sitting on a large balance after a funding round can breach the asset test, because cash in a bank account is held for the production of passive income. A look-through rule also applies where the company owns at least 25% by value of another corporation.
If an EIS or SEIS "fund" is in substance a nominee arrangement holding shares for you, the analysis runs to the underlying companies. If the vehicle is itself a corporation holding shares and cash, it can be a PFIC in its own right. The documentation decides this, and marketing material is not documentation.
Default treatment is the section 1291 regime: distributions above 125% of the average of the previous three years are "excess distributions", the entire gain on disposal is treated as one, and the portion allocated to earlier PFIC years is taxed at the rates for those years with an interest charge on top. Both escape routes are awkward here:
Part I need not be completed for a section 1291 fund where your aggregate PFIC stock is $25,000 or less at year end ($50,000 for joint filers) and you receive no excess distribution and recognise no gain — a reporting exception, not an exemption from tax. For the wider mechanics see our guide to PFIC tax rules for US investors abroad.
Take a US citizen resident in England, an additional-rate UK taxpayer, who subscribes £100,000 for EIS shares in 2026-27 and exits four years later at £250,000.
The UK side. Relief at 30% cuts the UK income tax liability by £30,000, so the stake costs £70,000. The £150,000 gain is exempt, so UK tax on exit is nil. UK CGT rates for 2026-27 are 18% and 24% with a £3,000 annual exempt amount, so the exemption saves £36,000 at 24%.
The US side. Everything is expressed in dollars at the rate prevailing when each item is received, paid or accrued, as the IRS guidance on foreign currency states. Assume, purely for illustration, 1.25 at subscription and 1.35 at exit.
The sterling gain of £150,000 at the exit rate would be $202,500, so currency has added $10,000 of US gain that does not exist in sterling. The holding period exceeds a year, so long-term rates of 0%, 15% or 20% apply — at 20%, $42,500 — and because capital gains are net investment income, a further 3.8% net investment income tax can apply above the statutory thresholds, up to $8,075 more.
Against which: no UK tax was paid, so no credit; and less than 10% foreign tax was paid, so the gain is US-source and cannot enter a credit basket. A UK exemption worth £36,000 has been met by a US bill that, on these assumptions, can approach or exceed the £30,000 of relief that made the investment attractive in the first place. That is arithmetic on stated assumptions — not a projection of returns, and not a view on the investment.
Note what the exchange rate did on its own: a sterling-flat investment can still produce a taxable US gain. Where the subscription is funded from a dollar account, or exit proceeds converted, there may be separate consequences on the cash itself — see our note on currency exchange gains and losses.
The loss position is asymmetric too. In the UK, a loss on EIS shares, reduced by the relief already given, can be set against income for the year of sale or the preceding one — fast relief at up to 45%. In the US the same loss is a capital loss: it offsets capital gains, and only $3,000 of other income a year ($1,500 if married filing separately), with the excess carried forward indefinitely. Where shares become completely worthless rather than being sold, they are treated as sold on the last day of the tax year in which that happened, which fixes whether the loss is long-term or short-term. A US person without gains can therefore take years to absorb a loss their UK return relieved in one.
If a UK wealth manager has just put an EIS or SEIS opportunity in front of you, these decide the US answer.
1. Am I subscribing directly for shares, or buying into a vehicle? Ask for the structure chart, not the brochure.
2. If it is a fund, is it a nominee arrangement or a corporate vehicle? That decides where the PFIC test bites.
3. What does the balance sheet look like once the round closes? Large cash against little revenue is the asset-test risk.
4. Will the company provide a PFIC Annual Information Statement each year? If not, a QEF election is off the table.
5. What is my US tax on the expected exit, in dollars, across a range of exchange rates?
6. How much UK tax do I expect to pay this year? Relief cannot exceed your UK liability, and reducing it reduces your credits.
7. If I use EIS deferral relief, what happens to the deferred gain in the US? It is taxed there when realised — and becoming non-resident revives it in the UK.
8. How would a total loss be relieved on each side?
No US citizen or green card holder should subscribe to an EIS or SEIS investment without the US position modelled first, because almost every decision that improves the outcome — direct shares or a fund, a QEF election, the timing of a disposal, whether to use deferral relief at all — has to be made before or at the time of investment. Afterwards the options are gone and only the compliance remains. The gap is structural rather than a failure of care: there is no reason a UK wealth manager would be reading the PFIC regime or the US sourcing rules.
If an EIS or SEIS subscription is on the table and you hold a US passport or a green card, the useful moment is before you sign. We are not investment advisers and express no view on the merits of any investment; we quantify the US and UK tax consequences of the decision you are weighing. A licensed CPA or Enrolled Agent reviews and signs off the US return, an ACCA-qualified accountant handles the UK filing, and the two are reconciled rather than prepared in isolation. To have that run alongside your UK adviser's recommendation, our tax specialists for US and UK can help, and you can book a consultation to talk it through.
This is general information about how two tax systems interact. It is not tax, legal or investment advice, and not a recommendation to make or refrain from making any investment.