Foreign Investment Fund in the United Kingdom
Are you looking to broaden your foreign investments? Perhaps extend your portfolios into the UK? If you are then you might want to sit down for this. The fundamentals of investment require individuals to educate and familiarize themselves with laws governing investments as well as the tax implications any investment attracts. However, first things first, what is a Foreign Investment Fund? These are funds pooled from different investors to be invested in foreign securities. Investments made by Foreign investment funds may be outside the investors’ country of residence.
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Keep in mind, if you’re a US citizen or Green Card holder in the UK… then any investments you make in the UK are considered “foreign” to the United States.
Most investors venture into Foreign Investment Funds to diversify their portfolios. Foreign investment funds fall into three major categories namely exchange-traded funds, closed-end funds, and mutual funds. Each country has legislation or laws that govern Foreign Investment Fund. The UK is no different! So let us get down to it and establish the meaning of the terms.
a) Exchange-Traded Funds
It is an investment basket or a pool of funds from several investors that hold stocks, bonds, and other securities and is traded on a stock exchange. There are different types of Exchange-Traded Funds. However, all of them are designed to track a specific index. This means that if an investor decides to buy shares of a single ETF, he or she will have a stake in all the platforms that particular ETF has made investments in. The performance of Exchange-traded funds is often tracked since they are traded throughout the day at the normal trading rates in the domestic country. Prices of ETFs may vary based on supply and demand aspects.
b) Close-ended Funds
This is a type of mutual fund that allows investors to raise initial capital for investment in stocks or bonds through a one-time Initial Public Offering (IPO) of a fixed number of shares. Just like the Exchange-Traded Fund, Close Ended Fund can be actively managed and traded on an exchange like a stock by an investment firm. Close Ended Fund shares are traded throughout the day and offer high returns on a rising market. Once the initial capital raise has been concluded, no new investments or shares can be created.
c) Mutual Funds.
This is an active fund managed by investment professionals that raises a pool of money from several investors to invest in securities such as bonds or stocks. This type of fund is ideal for small business persons looking to establish a portfolio in a foreign country. Also due to a large number of initial investment companies involved, the risk is significantly lower.
Factors to Consider when setting up a Foreign Investment Fund
As earlier established, any foreign investment must be preceded by knowledge. The conditions that favor foreign investment are highly volatile and vary from one country to the next. Here is some insight into what you could consider as a foreign investor
i. Economic and Political Situation
The country you are looking to invest in must have stable economic growth as well as predictable political situations. Any uncertainty in these two can negatively impact stock and by extension tank your investment.
ii. Currency Strengths
A stronger and stable currency presents an opportunity for a foreign investment fund to grow into profits resulting in higher dividend payouts for the investors.
iii. Market research
As a foreign investor, this is important in learning the market trends in the foreign country you want to extend your portfolio. It will also help you understand existing government regulations regarding foreign investments in certain strategic sectors of the economy. For instance, the UK government reserves levels of control over some sectors like transport, energy, healthcare, defense, and media.
iv. Nature of investment
It is important to establish right from the onset whether a foreign investment fund is intended for short-term investments or long-term. This will not only inform the sectors of the foreign economy to invest in but also the extent of investment. Moreover, the investors must be aware of whether it is a foreign direct investment or a Greenfield investment. The former is regulated by the UK government through the UK’s National Security and Investment Act 2021 which allows the state to scrutinize entities seeking to acquire companies or assets in key sectors of the economy
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Why invest in the United Kingdom?
For many, the United Kingdom presents a lucrative Foreign Investment destination. One might ask, why the UK? The perks of having a portfolio in the UK include but are not limited to:
i. Stable currency
The currency remains a determining factor as far as the success of the Foreign investment fund is concerned. Currency fluctuations significantly affect the performance of Foreign investment funds which is why the UK’s stable currency presents the foreign investor with a unique opportunity to expand their portfolio in the country.
ii. Access to the many fortune 500 companies based in the UK
The United Kingdom is home to 60% of the Fortune 500 companies in Europe. The said companies are well established not only in the UK but across the globe. This gives foreign investors who channel their foreign investment funds to such companies a global portfolio. With it comes a chance for greater returns.
iii. Conducive business environment
According to the World Bank’s 2020 Doing Business guide, it takes an average of 13 days to set up and launch a business in the UK. This is one of the best timelines globally and is likely to stimulate foreign investments in the country. Additionally, the UK is one of the most stable and liberal countries in the world
iv. Favorable Government Policies
The UK government has demonstrated goodwill in advocating for equal rights for all UK companies both foreign and domestic. This is in addition to the facilitation of foreign investment companies to largely integrated markets. Such proactive policies are key drivers of Foreign Direct Investment in the UK. Moreover, the country’s legal framework is among the most flexible in the world.
While Foreign Investment Funds may seem like lucrative ventures, several high-risk factors come with them. However, for those brave enough to undertake appropriate market research and make the right foreign investment choices, the risks remain non-issues.
Of course, anyone with US citizenship needs to be aware of their US tax obligations when making investments outside of the United States.
US tax law makes foreign investments complicated from a tax compliance perspective. Some wonder if it’s done on purpose… as an incentive for Americans to invest via the United States instead.
The big UK investment to avoid is a Stocks & Shares ISA which is offered by many UK banks. The US tax treatment of these UK tax-free accounts is intrusive and expensive to stay in US tax compliance. US tax can also be payable on the dividends and growth in the account.
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