VCTs and EIS schemes are popular in the UK as investment vehicles when other products are maxed out. So do Americans in the UK with US tax reporting situations get the same benefits as non-dual citizens.
Are you a venture capital trust or enterprise investment scheme (EIS) investor? If not, should you be? The government-backed venture capital trusts (VCTs) and enterprise investment schemes (EIS) are two of the UK’s most successful investment structures designed to entice private individuals and the institutional investment community to our money in to small, high-growth companies.
The major attraction is tax: there are generous government-approved incentives for investing in qualifying businesses. EISs and VCTs cater for two very different types of investor and different considerations with regard to levels of risk and return and have their own rules, benefits and idiosyncrasies.
Benefits of VCTs and EIS in Financial Planning
- Tax Efficiency: VCTs and EIS both deliver substantial tax advantages. Up to a maximum of £200,000 per tax year, VCTs reward you with 30 per cent income tax relief on investments. EIS allow up to £1,000,000 per tax year with 30 per cent income tax relief.
- CGT benefit: Both schemes are exempt from capital gains tax on profits if the shares are sold nad conditions are met.
- Reduction of risk through diversification: both VCTs and EIS spread your investment across numerous small, unlisted companies, thus reducing your risk while potentially increasing your returns.
- Supporting Innovation: Both schemes play an important role in seed-funding innovative, fast-growing companies, thereby contributing to economic growth and job creation.
Suitability for Different Types of Clients
- High-Income Earners: tax-efficient way to reduce income tax bill and invest in into (potentially) high-growth investments.
- Pension planning: can enjoy the tax-free growth/income from VCTs and EIS.
Considerations for US Persons
VCTs and EIS can be wonderful tools, but they don’t work for US persons because of the PFIC and CFC rules. These rules place significant amounts of reporting on the US citizen and complex tax liabilities.
This is not to say that there is no alternative path for US persons who want to invest globally. ISAs and general investment accounts are things to consider with a buy and hold strategy to avoid higher short-term capital gain tax and benefit from time tapers. When American’s are considering investments, it is a really good idea to have a financial advisor involved in the process.
Bottom line
VCTs and EIS schemes are really useful to know about for your financial planning; they provide tax efficiency, a certain amount of diversification, and they are a great way of supporting innovation but the exact nature of your suitability as an investor would depend on your personal income tax circumstances and your residence status. For American’s it’s not as straightforward to just assume “it’s all good”. It’s complex when considering your US status with the rules regarding PFIC (passive foreign investment company ) or as a CFC (controlled foreign corporation) in the IRS tax system. This will subject you to further reporting obligations and punitive tax that will cancel some of the UK major benefits of these schemes.