With an estimated 200,000+ people in the U.K with U.S citizenship. It is a complex situation to navigate investing as a U.S expat. You have to deal with numerous legislations that make it challenging to invest such as DTA, PFICs, and FATCA (not an exhaustive list).
PFICs tax
I have written about this in a number of articles, but in short, it’s a sticky situation. As you find that you will need to invest in American stocks or shares in USD. However, in the U.K/E.U they will only be funds in GBP or EUR. For example, you can open an IBKR account but it will send you to the European section which invests in GBP or EUR.
PFICs can wipe off most of the gains and make filing the tax difficult.
The U.K has its own version of PFICs tax and you need to ensure that you are careful when choosing your investments. ETFs will only obtain treatment from HMRC if they qualify as approved offshore reporting funds. If the funds do not qualify for HMRC reporting the tax will be due at your marginal income rate as well as not being able to offset the losses from your gains in non-reporting funds. This is why it’s critical to understand the taxation of funds in the U.K/U.S
The U.K has a 12,500 GBP annual capital gains tax-free allowance. Anything over this amount takes a progressive taxation system from 20%-45% depending on the amount.
Options for this are to invest in a DTA pension, unfortunately in the U.K ISA does not count (as of writing 2022) with the U.S DTA. You could make the argument of going into a LISA with the 25% free amount up to 4000 GBP if can afford the illiquidity.
Other options would be to max out your SIPPs, you have a 40,000 GBP a year limit (if you have not started withdrawing from your MPAA or if you earn less than 240,000GBP it reduces 1 GBP for any 2 GBP you earn over the limit). However, be wary as the U.K has a limit on tax-free pensions this is presently, and likely stay for the next few years, at 1.073 Million GBP.
This is in contrast to the U.S which has no limit on pension savings. I have written articles on pension options if you go over the lifetime limit. But, for a U.S person, it might be worth looking at U.S options if you have maxed out this option to the LTA. Alternatively, you can look at offshore trust options that allow for no limit. Also, when considering what to contribute consider options, such as RMD on April 1st on U.S accounts in the year after you turn 72. While the U.K has no RMD but it does have a different taxation system if you die before or after 75.
In the U.S as I have written in my other articles you can contribute to your IRA account although the ISA/SIPPs have a limit, and with IRA this is limited to a maximum of $6000 or $7000 (if over 50) and reduces depending on income.
FATCA
The next problem regardless of the PFICS is FATCA, again I have spoken about this in detail in other blogs and I will go over it here as well.
It means for most Americans abroad (you might have found out) do not want to open a brokerage or bank account or because they simply can’t due to the rulings. Many service providers don’t accept US clients because they don’t want the complications of US filings.
Investments for Expats, along with its partner companies do have options on platforms, inside and outside the U.S. If this is something you are interested in, please email me at info@investmentsforexpats.com
U.K/U.S treaties
I have mentioned above that ISAs are not included in U.S treaties. In the U.S you can opt for IRA/ROTH IRA/401K plans which all opt towards the treaty. On the U.K side, U.K employer pension schemes and SIPPs allow for tax deferral.
Estate Planning
The U.S has a $12.06 million in estate tax (doubling with a U.S partner) but the U.K as of writing at the base rate of 325,000 GBP (500,000 GBP with a U.K prime residence and doubling with the U.K deemed domiciled spouse). This is an important factor if you are looking to get U.K citizenship or married to a U.K spouse.
The difference between the two is staggering and this is something to factor in when you look at passing on any wealth.
How to live in U.S tax efficiently
The U.K can be a tax-efficient place to live for HNWs if you do have remittance tax. This is where you can pay a 30,000 GBP amount for 7 years. As long it meets certain circumstances such as being made outside the U.K. More information can be found here:
https://www.gov.uk/tax-foreign-income/non-domiciled-residents
If you do have any questions on these aspects please feel free to email me at info@investmentsforexpats.com
