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UK tax year end planning 2019/20: Income Tax and Capital Gains Tax

UK tax-advantaged investments rarely have any beneficial impact on the US liability but can be effective in reducing UK tax.

Last updated: 3 February 2020

For individuals with excess foreign tax credits carried over from prior years, Enterprise Investment Scheme (EIS) investments can be an effective way to utilise these credits without incurring a US tax charge. Excess foreign tax credits carried forward to future years have a limited life of 10 years before they are wasted.

However, Venture Capital Trusts (VCTs) and investments within ISAs, are often considered Passive Foreign Investment Companies (PFICs) for US tax purposes. We would not normally recommend them for a US taxpayer because PFICs are subject to US anti-avoidance rules that make them tax inefficient. Cash ISAs are not PFICs so the interest is simply taxed at US income tax rates and Net Investment Income Tax (NIIT) if due. In some cases, it will be possible to find funds for an ISA that are not PFICs, but the investment options are more restrictive.

What should you do?

You may want to review your excess foreign tax credit position and determine whether EIS investments could help utilise some of these excess credits.

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