The tax challenges of being an American in the UK are legion, warns Josh Matthews of MASECO
US connected individuals living in the UK have reporting obligations to HMRC and the IRS. The US taxes the worldwide income and capital gains of all US citizens regardless of where they live.
The US Bank Secrecy Act also requires that every US citizen, Green Card holder or resident alien must file an annual report of Foreign Bank and Financial Accounts if you have a financial interest in (or signatory authority over) foreign accounts in aggregate worth $10,000 or more on any one day during the tax year. This includes US beneficiaries of foreign trusts. Anyone resident in the UK for more 15 out of the last 20 years no longer have a choice whether to pay the annual Remittance Basis Charge and are required to pay tax on an arising basis.
The vast majority of Americans living in the UK elect to pay tax on an arising basis anyway and are taxed by the UK on their global portfolios. When dealing with the taxation of global portfolios, it is important to know how investments are viewed in both jurisdictions from a tax perspective.
Investing in non-US regulated collective investments such as offshore Exchange Traded Funds (ETFs), Unit Trusts and Open Ended Investment Companies (OEICs) will cause US individuals to fall foul of the IRS’s Passive Foreign Investment Company (PFIC) rules.
IRS taxes these aggressively: all gains may be subject to taxes and penalties of up to 100 per cent of the growth. Utilising UK-based savings arrangements such as Individual Saving Accounts (ISAs), investment bonds, and Self-Invested Personal Pensions (SIPPs) may have unattractive US tax consequences for US citizens resident in the UK. The way the IRS classifies UK pensions is a complex and grey area often requiring advice from a qualified tax adviser.
Fortunately, the UK has a treaty with the US that may allow the US taxpayer to treat the SIPP as a Foreign Pension and thus the growth in value will be tax deferred until distribution. The treaty may also protect the growth in company pension arrangements from becoming US taxable. Additional US trust reporting may arise for individuals with pensions as well.
From a UK perspective, HMRC classifies the growth of most US Mutual Funds and ETFs as Offshore Income Gains (OIG) unless the fund has gone through the process to gain UK reporting status. If the fund does not have UK reporting status then the growth is taxed at the individual’s marginal income tax rate rather than at capital gains tax rate.
Additionally, it can mean the difference between being able to utilise the UK capital gain allowance each year. This can be exacerbated if the foreign exchange rate moves in an unfavourable direction. There are many reasons why Americans living in the UK should seek out the advice of an experienced wealth manager who understands their unique circumstances and is authorised and regulated to give advice in the UK and the US.
It is extremely difficult for investment advisers to adequately advise US citizens if they are not fully aware of these intricacies. Finding an adviser who is authorised and regulated by not only the Financial Conduct Authority (FCA) in the UK but also by the Securities Exchange Commission (SEC) in the US can allow you to navigate the complex US-UK waters and leave you with a level of comfort.
- Are any investments US Mutual Funds and possibly taxed at income tax levels in the UK?
- Are your investments regarded as PFICs for US purposes?
- Tax wrappers can ensure the currency of assets matches the client’s long-term liabilities
- Are excess foreign tax credits being used effectively?
- For multiple nationality couples, are assets structured for tax advantage of opportunities in both jurisdictions?
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private.