Britain pays you to back a startup. America sends the bill afterwards

Figures relate to tax year 2025-26 (UK) · 2025 (US)

An angel investment in a British startup comes wrapped in some of the most generous reliefs in the tax system. Thirty per cent of your money back against income tax. No capital gains tax on the upside after three years. Loss relief if the company folds.

Then you fill in an American return. None of those reliefs exist there, and one of them can quietly make your American position worse. EIS shares are a good example of a British investment that does not travel.

Key takeaways

• America ignores the reliefs that make EIS shares attractive in Britain.
• A gain that is tax free in Britain can still be fully taxable in America.
• Less British tax paid means less foreign tax credit to use elsewhere.
• An early stage company sitting on cash can meet the American fund tests.
• A holding of 10% or more can bring annual reporting with it.
• British loss relief and American loss relief work in completely different ways.

What is the Enterprise Investment Scheme?

It is a British scheme designed to push private money into small, higher risk trading companies. Investors get income tax relief on the amount subscribed. They also escape capital gains tax on a qualifying disposal after three years, with loss relief if the company fails. According to HMRC guidance, the company must also meet its own conditions.

The smaller scheme for very early companies works on the same pattern with a higher rate of relief. Both sit inside the venture capital rules.

The reliefs are real and they are valuable. They are also entirely British, which is the point of this article.

Why the British reliefs stop at the border

America taxes its citizens on worldwide income under its own rules. It has no concept of the scheme, so EIS shares get none of the relief, the exemption or the special loss treatment.

The treaty does not rescue this either. The saving clause lets America tax its citizens as though the treaty were not there, and no exception covers venture capital relief.

So you end up with two completely separate answers about the same EIS shares. Britain says one thing, America says another, and both are correct in their own systems.

What happens to the 30% income tax relief?

Nothing, on the American side. The relief reduces your British income tax bill, but America gives no equivalent deduction. Your American taxable income stays exactly what it would have been without the investment.

There is a second effect that catches people out. Paying less British tax leaves less foreign tax to credit against your American liability.

So a large claim can lift your American bill on unrelated income. We see this most often with people who invest heavily in one year.

How does America tax EIS shares?

As ordinary shares in a foreign company, in most cases. You have a cost basis in dollars, you hold the shares, and you report a capital gain or loss in dollars when you sell. Dividends, if any ever arrive, count as income in the year paid.

That simple answer covers most EIS shares, and often it is enough. The complications come from what the company itself looks like, not from the scheme.

Two American regimes can override the simple answer. One targets foreign companies that look like funds, and the other targets foreign companies controlled by Americans.

Does the three year exemption work in America?

No. Britain can exempt the whole gain on a qualifying disposal after three years. America taxes the same gain in full at its own rates. The exit that produced no British bill can produce a substantial American one.

The sting is the credit. No British tax paid means no British tax to credit, so the American charge stands alone.

Our guide to the foreign tax credit explains why an exempt gain is the worst kind for a dual filer.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Tom subscribes £100,000 for EIS shares in a trading company in 2021 and claims £30,000 of income tax relief in Britain. His American return for that year shows no deduction at all.

In 2026 the company sells and he receives £400,000. Britain charges nothing, because he held the shares for more than three years and the conditions held.

America sees a gain of roughly $390,000 on the dollar figures, taxed at long term rates with no credit available. The net investment income tax can apply on top.

So the investment worked beautifully in one country and cost him a six figure sum in the other.

The two systems side by side

Could the company count as a fund?

It can, and this is the risk most investors never hear about. America treats a foreign company as a fund where too much of its income or assets is passive. A startup that has just raised money can meet that asset test. The cash sits on deposit, and deposits count as passive.

The consequences are harsh. Gains get taxed at the highest ordinary rates with an interest charge added for every year you held the shares.

Elections can improve the position, but they generally need making early and they need annual information from the company. Our guide to the purging election covers one route.

What if you own 10% or more?

Then a different regime may apply. Americans holding at least 10% each may together own more than half the company. That makes it a controlled foreign corporation. Each of those holders files annually, and some retained profit can reach their returns before any dividend arrives.

Angel rounds cross that line more often than founders expect. A few American investors and an American founder add up quickly.

Our guide to US citizens on a UK cap table sets out how to test the register after each round.

What reporting does an EIS investment trigger?

EIS shares count as a specified foreign financial asset. They feed into your annual asset disclosure once your total crosses the threshold. Shares held directly are not a bank account. So they stay off the foreign bank account report.

Fund or company status adds further forms on top. Those are the ones with real penalties attached.

Per IRS guidance, the asset thresholds differ for people living abroad, and they are considerably higher than the domestic figures.

What about the seed scheme?

The seed scheme offers a higher rate of relief on a smaller annual amount. It targets very young companies. America treats those shares exactly as it treats EIS shares, so nothing improves there. The earlier the company, the more likely it looks like a fund.

So the British relief is better and the American risk is worse. That combination deserves a look before you subscribe.

What happens if the company fails?

Britain is generous here. You can usually set the loss against income rather than only against gains. That softens the blow for a higher rate taxpayer. America gives you a capital loss instead, and capital losses offset capital gains first.

The rest carries forward indefinitely. For an investor with no other gains, that can mean waiting years to use it.

So the downside protection you were promised only half works. Factor that into the size of the cheque.

Does deferral relief carry across?

No. Britain lets you defer an earlier capital gain by reinvesting it into qualifying shares. The tax waits until you sell them. America has no matching provision, so the original gain stays taxable in the year it arose.

That creates a timing mismatch as well as a cash one. You pay America now and Britain later, and the credit rules struggle with that order.

Check the position before using deferral relief. It is one of the few reliefs that can leave a dual filer worse off.

How to review an investment before you subscribe

1. Ask what the company will do with the money in the first twelve months.
2. Find out how much of the raise will sit in cash or deposits.
3. Ask what share of the register American investors already hold.
4. Check whether you will cross the 10% line yourself.
5. Agree in writing that the company will supply annual figures if needed.
6. Work out the dollar cost basis on the day you subscribe.
7. Decide whether any American election needs making in the first year.

What about inheritance tax and estate tax?

British business relief can take qualifying shares out of inheritance tax after two years. That is a real advantage for an estate. America has no equivalent, so the shares stay inside your estate at full market value.

For a large estate that difference matters. The treaty on estates helps in some cases, and it needs looking at properly rather than assumed.

Our guide to US-UK inheritance tax covers how the two systems interact.

Does the company need to help you?

Often yes, and it is worth asking early. Working out whether a company counts as a fund needs its income and asset figures each year. Most small companies will share them if you ask when you invest. Getting that promise afterwards is much harder.

Put it in the subscription correspondence. A short line about annual figures costs nothing at the time.

Some companies already supply this to American shareholders. Ask whether any sit on the register before you raise it.

If the company refuses, weigh that against the size of your cheque. A holding you cannot report properly costs more than it looks.

Mistakes and penalties we see with EIS shares

The first is treating the British certificate for EIS shares as the end of the matter. It records a British claim and says nothing about the American position.

The second is missing the fund analysis in year one. By the time somebody looks, the cheapest elections have usually expired.

The third is losing the dollar cost basis. Without the rate on the subscription date, the gain at exit comes out too high.

The fourth is silence at exit. A tax free British disposal still belongs on the American return, and omitting it is the version that carries penalties.

How US UK Tax Accountants helps

We review the company before you subscribe and test it against the American fund and control rules. We record the dollar basis while the paperwork is fresh. Then we tell you what the exit will cost in America, years before it happens.

Where you already hold EIS shares, we check whether an election still helps. Our treaty relief service covers the wider planning around it.

If a round is open and you are American, get in touch before you sign. The cheapest fixes all live in the first year.

Last reviewed 24 September 2026. This article is general information and not personal tax advice. Every investment turns on its own facts, so take advice on yours before subscribing.