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Treatment of SEIS by the IRS

Treatment of SEIS by the IRS

Old Oct 30th 2023, 11:42 pm
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Post Treatment of SEIS by the IRS

Hi everyone, my first post here, although browsing has been very useful! I (UK citizen, current UK resident) am in early 2024 expecting an IR1 visa and subsequent 10 year green card through my wife (US citizen, current US resident). On this forum I have browsed extensively questions in regards to ISA, Lifetime ISAs, pensions, etc. which are all very helpful - thank you.

However, one question I have not seen asked is about how the IRS would treat Seed Enterprise Investment Scheme (SEIS) or EIS investments. I made an SEIS investment in a UK business about 3.5 years ago, which comes with significant UK tax benefits - reduction of capital gains most notably. It is feasible that if I were to stay in the UK I would realise sizeable gains from this; if it were to be realised now, it would likely be only 2x, with strong potential to realise greater multiples in the future. In the UK, this would be CGT exempt under the SEIS tax relief.

I am not expecting good news here, but does anyone have any experience of handling SEIS investments in regards to tax after becoming resident in the US? My UK IFA has been unable to provide any specific advice due to a lack of expertise in the US market, I am currently seeking out a CPA in the Northern Virginia area who might be able to help.

Thank you in advance!
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Old Oct 30th 2023, 11:50 pm
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Default Re: Treatment of SEIS by the IRS

No experience, but my research before moving always came to the same thing, aside from some pension type investments, best case it’s treated like cash, worst case even more punitive treatment or onerous reporting is required. I have an Irish PRSA… all in “cash” to avoid issues, no way to transfer it to the US and loses value every year…

can you sell or gift the investment to someone else in the UK like family so you don’t own it?
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Old Oct 31st 2023, 10:19 am
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Default Re: Treatment of SEIS by the IRS

A quick look to see what a SEIS is and I’m pretty sure it will be treated as a PFIC by the IRS and taxed punitively.

When you invest in an EIS or SEIS fund, instead, you acquire shares in the underlying companies. As those are not typically listed, you cannot usually sell your shares on the stock market.
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Old Oct 31st 2023, 2:11 pm
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Default Re: Treatment of SEIS by the IRS

Originally Posted by furstyferret
Hi everyone, my first post here, although browsing has been very useful! I (UK citizen, current UK resident) am in early 2024 expecting an IR1 visa and subsequent 10 year green card through my wife (US citizen, current US resident). On this forum I have browsed extensively questions in regards to ISA, Lifetime ISAs, pensions, etc. which are all very helpful - thank you.

However, one question I have not seen asked is about how the IRS would treat Seed Enterprise Investment Scheme (SEIS) or EIS investments. I made an SEIS investment in a UK business about 3.5 years ago, which comes with significant UK tax benefits - reduction of capital gains most notably. It is feasible that if I were to stay in the UK I would realise sizeable gains from this; if it were to be realised now, it would likely be only 2x, with strong potential to realise greater multiples in the future. In the UK, this would be CGT exempt under the SEIS tax relief.

I am not expecting good news here, but does anyone have any experience of handling SEIS investments in regards to tax after becoming resident in the US? My UK IFA has been unable to provide any specific advice due to a lack of expertise in the US market, I am currently seeking out a CPA in the Northern Virginia area who might be able to help.

Thank you in advance!
Best to liquidate everything before you come over (IMO)
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Old Oct 31st 2023, 2:54 pm
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Default Re: Treatment of SEIS by the IRS

I do have knowledge of PFICs but very little regarding SEIS shares so read the following with that caveat.

Is the SEIS a single company or a fund? If it’s a fund of SEIS companies then it is a PFIC and you should sell it before you get here. If it’s invested in a single company it depends. The two main tests of a PFIC are that 75% or more of its gross income for the taxable year is passive income, or at least 50% of its assets are held to produce passive income. All fund type investments are PFICs because of the first condition because the fund itself does not actually do anything other than collect dividends, interest and capital gains (or losses), even though the underlying individual shares do. If the SEIS is a single company it could fail the first test depending upon whether or not it actually does anything to create value, and it could fail the second test if has 50% or more of its working capital in cash.

The option to tax a PFIC using the MTM method (which is better than the default method but still not good) won’t be available to you because the shares would need to be traded and valued on a regular basis and I don’t think that is the case with SEIS shares.

If it is not a PFIC then it would likely be taxed at normal IRS rates, so would not be a problem, other than potentially having to prove that that it is not a PFIC if you were audited and the focus of the audit was the SEIS shares.
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Old Oct 31st 2023, 3:45 pm
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Default Re: Treatment of SEIS by the IRS

One other thought:

If you can realize the gains before you leave the UK they will be tax free. If you wait until you get to the US (and it is not a PFIC) you will be paying CGT on the entire profit, including any unrealized profit made before arriving in the US. Depending upon your income CGT would be 15% or 20%, potentially plus the 3.8% Obamacare tax that applies if total income (from all sources) exceeds $250K, plus state tax. So tax could be well in excess of 30% applied to all existing unrealized profits that would otherwise be tax free in the UK. It might worth considering how much your SEIS investment would need to grow to recover from that tax hit, taking into account the fact that you can reinvest the proceeds in US approved vehicles and eliminate any doubt about the tax status of such investments.
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Old Oct 31st 2023, 5:08 pm
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Default Re: Treatment of SEIS by the IRS

SEIS investments are with individual companies, and as OP says, they hold shares in a single company. They are often sold on crowdfunding platforms like Seedrs.
Therefore PFIC is not an issue here - that's the good news.
The bad news is that SEIS is not an explicit part of tax treaty and so you will not get cap gains exemption when you sell if you are a US person at that time.
However, you already got income tax deductions when you made the investment, so it was still worthwhile.
If you would like to keep the investment I don't see any reason not to do so, but you will pay US cap gains dependent on amount when you sell.
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Old Oct 31st 2023, 6:19 pm
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Default Re: Treatment of SEIS by the IRS

A single company with shares can still be a PFIC. It must pass the PFIC test before being considered a non PFIC. SEIS investments are also available as a fund of SEIS companies and those are most definitely PFICs. It may not matter to the OP but it is important that others are aware of that.
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Old Nov 2nd 2023, 1:37 pm
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Default Re: Treatment of SEIS by the IRS

I would be surprised if the shares are not PFICs. You may want to ask the company if they have the capacity to do any PFIC testing, it is usually the passive asset test that catches EIS holdings.
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Old Nov 7th 2023, 2:50 pm
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Default Re: Treatment of SEIS by the IRS

I may well be wrong, but I find it hard to believe that most SEIS investments would have >75% passive income or >50% of assets in income investments.
Funds of SEIS would clearly be PFIC, but I've never seen those. If you're investing in individual start-ups eligible for SEIS, they are using that cash mostly for payroll and COGS.
My accountant also wasn't worried about them.
I defer to CC and GG, but just my $0.02.
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