Enterprise Investment Scheme (EIS) investment for the US person in the UK
Historically UK pensions have been a good way to achieve UK tax relief and it is also an opportunity for US persons living in the UK to efficiently use their excess foreign tax credits on their US tax returns. However, with the introduction of the tapered allowance for new pension contributions, high earners are restricted in their ability to make sizable contributions and have fewer opportunities to seek tax relief.
As such, many individuals are now seeking other ways to achieve tax relief and also efficiently use their foreign tax credits. One possible way is through investment in an Enterprise Investment Scheme (EIS). EIS was set up to encourage investment into small unquoted companies carrying on a qualifying trade in the UK. As investing in smaller companies often comes with a greater level of risk, tax relief is used to incentivise that risk. EIS offers those who invest in qualifying companies both income tax and capital gains tax benefits.
Individuals receive income tax relief on 30% of the amount invested (one can make an investment up to £1,000,000 per year). Provided you hold the investment for the requisite time period, there is no capital gains tax on disposal and there can be inheritance tax benefits as well. Relief is also available for reinvesting capital gains into a new EIS in the instance that disposal does attract capital gains. Additionally, if appropriate, an individual can get loss relief at their marginal rates of income tax.
Excess foreign tax credits can be carried forward for ten years and can generally be utilised against foreign income that is deemed to be taxable in the US but is not taxable in the UK. Investment in EIS is one way to utilise these excess foreign tax credits. Individuals can lower their UK taxable income and at the same time can use excess foreign tax credits to avoid any residual US tax that would otherwise apply.
It is important to note that EIS investments do come with some constraints. The EIS investment must be held for at least three years or the UK tax benefits are clawed back. In addition, the investor cannot be related or have a controlling stake in the entity. Given the holding requirement and the higher risk associated with the unquoted and relatively unknown companies, it is extremely important to maintain prudence. Whilst tax savings is beneficial, you don’t want to enter an investment that may lead to large capital losses. It is possible to invest in an EIS fund that helps to spread the risk over a number of qualified companies. But, for US persons, this generally means that the EIS could be considered a Passive Foreign Investment Company, or PFIC, which can easily change the benefits realised. With this in mind, any US person considering EIS should generally seek investment in a single company EIS where there is greater accessibility to information and visibility of projects.
For an individual with low to no debt, who has built up an accessible and diversified investment strategy alongside their emergency cash savings, and is looking for additional investment opportunities to benefit from, consideration to an EIS may be beneficial. However, careful consideration should be given to your risk tolerance, the illiquidity of the asset and ensuring that it does not qualify for PFIC treatment for US tax purposes.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back some or all of the capital invested.
The tax treatment of Enterprise Investment Schemes depends on the individual circumstances of the investor and may be subject to change in the future.
Enterprise Investment Schemes are high risk investments as they involve investing in smaller companies and can be complex. Often there is no market for the shares and it may therefore be very difficult to make a disposal.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.