Buying HMRC reporting funds through a UK broker

Hi everyone

I am new to investing and HORRIFIED to discover the dual citizen tax trap my government has put me in. On the plus side, as I am at the beginning of my investing journey, I want to set it up well and avoid mistakes. This forum has been a very useful resource for which I am very grateful. I would welcome clarification on one point.

If I purchase reporting fund ETFs (eg Vanguard ETFs) through a UK-based broker (eg H&L) do I get around the PFIC problem?

This article https://creativeplanning.com/insights/americans-in-the-uk-need-to-avoid-this-catch-22-investment-trap [nofollow] suggests as long as it's a US ETF and a reporting fund, it will avoid the 'Catch 22'. Sounds good to me. BUT a recent webinar by the same company suggested that the best solution to PFIC # for expat investing was to only hold US ETFs through a US broker. (replays can be requested on their website). The presenter never states it explicitly but uses the same expression several times, and in the Q&A he often suggests opening a US brokerage account. I have found this forum post from 2013 helpful suggesting that with the right CUSIP numbers, it should be fine - but the posts never specified whether it worked or not.

So my question is simply – is there an advantage/disadvantage to where the broker itself is based for PFIC rules, or other matters?


I went ahead and opened a Stock/share ISA with H&L intending to invest in US based Vanguard funds through them. Now I see the fees, I realise that's not ideal and in the long term I will regret it. I also see that HL may withhold 30% for tax as well. So I've paused on that to consider options...

From posts 5+ years old on this forum, I gather that opening a US brokerage would be considered optimal among forum members. Unfortunately I don't have a US address so I am not sure it will be possible to open one – unless I get creative. It's hard to find a broker for overseas residents, there's a poor exchange rate right now and the future of sterling doesn't look good, and I don't ever expect to live or retire to the US. So while this could help get around the PFIC monstrosity, it may not be optimal for my particular life situation. If there aren't PFIC implications from reporting funds bought through H&L I may stick with that route.

Any advice appreciated, and once again gratitude to all the many members who have helped others in the past - it's still helping!

Good wishes y'all

I don’t know the answer but am interested in the responses. We have our HMRC reporting funds in Vanguard in the USA but we set these up before we moved back, and Vanguard is pretty easy to manage from England using our address and phone number here. Reporting the dividends and cap gains on our HMRC return is easy enough. From the start, and each year since, we stated on our HMRC return that we treat the US calendar year as if it was the UK tax year which enables to use the 1099s for the figures rather than keep spreadsheets to track the differing tax years and that works well.

Vanguard UK doesn’t allow USCs as customers so that is a non-starter.

I am interested in an answer to this too. While I do also hold a US Vanguard account, given the exchange rates at the moment it would be good to invest in some individual stocks in an ISA here. Mainly Berkshire Hathaway as it is about as close as you can come to an S&P500 ETF in an individual stock. I am curious if there are any broakers who handle dual US/UK citizen clients and don't withhold 30%/15% as HL does? It looks like potentially Schwab does this? Lastly is the withholding only for dividends and interest and not capital gains?

An interesting discussion and like @durhamlad I'd be interested to hear other responses.

I hold all of my investments within a SIPP - (I have my own Ltd company that funds it alongside my own employee contributions) administered and traded through IWeb (https://www.iweb-sharedealing.co.uk/) which I've found to be one of the cheapest and one that accepts USC's - many SIPP providers do not.

My top two investments are iShares S&P 500 Information Technology Sector UCITS ETF USD (IUIT) & SPDR S&P U.S. Financials Select Sector UCITS ETF (SXLF) - both HMRC reporting funds. 12% of SXLF is in Berkshire Hathaway.

The challenge you'll find is that UK brokers aren't allowed to sell you US ETFs, HMRC-reporting or otherwise. That's another nice little bit of the catch-22: there's a piece of EU regulation that was written into UK law as part of Brexit, called MiFiD. The relevant part of that prohibits "marketing" investments to retail investors resident in the EU/UK unless they publish a Key Information Document - supposedly for consumer protection. No US ETFs (that I've ever found) publish such a document, and I understand there's a clash between the EU/UK rules and SEC rules that mean they can't follow the rules to publish a KID.

In practice, that means EU/UK residents find it very challenging to purchase US ETFs. There's nothing against the rules in you buying them, only in the broker selling them to you. And HMRC-reporting ones are generally good for UK residents, aside from the challenge of purchasing them.

Some workarounds:
1. The reason the presenter suggested a US broker is that they may allow you to buy US ETFs - IF they either don't care about the EU/UK rules, OR they don't know you're UK resident (i.e. you use a US address for the account).
2. There's a weird quirk where options on US ETFs are allowed to be sold to retail investors in the UK/EU, just not the underlying ETF. If you exercise the option to get the underlying ETF, now you own it, completely within the rules. Don't get me started on the stupidity of the rules allowing people to buy options (a far more risky and complex investment) but not these very vanilla ETFs. Biggest downside, aside from the faff, is that you have to buy in lots of 100 shares, which can be a chunk of change for some of these ETFs (100 shares of VTI would cost about $20k).
3. Get recognized by your broker (US or UK) as a professional investor under the MiFiD rules. Broadly speaking, you need to meet any 2 of 3 criteria: a) >€500k invested b) employed in investing c) history of active trading (something like 10 trades per quarter for the past year).

To answer your question in bold: PFIC doesn't care where the broker is located, it cares where the underlying funds are domiciled. US funds are good. Irish, UK, Luxembourg, etc. funds are bad. Theoretically, you could even buy European funds from a US broker - that's perfectly legal, just puts you in PFIC pain (unless you do it in an IRA - I do this as another workaround).

I am interested in an answer to this too. While I do also hold a US Vanguard account, given the exchange rates at the moment it would be good to invest in some individual stocks in an ISA here. Mainly Berkshire Hathaway as it is about as close as you can come to an S&P500 ETF in an individual stock. I am curious if there are any broakers who handle dual US/UK citizen clients and don't withhold 30%/15% as HL does? It looks like potentially Schwab does this? Lastly is the withholding only for dividends and interest and not capital gains?

You might try Interactive Brokers as well. I'm not certain how their withholding works, but they are known for being as flexible as possible, within the law - they enable people to use the legal loopholes that other brokers don't bother with. They definitely don't mind US/UK citizens, offer ISA and IRA, etc. (no SIPP).

Thank you so much tubaleiter. In all my research I haven't even heard of Mifid (it sounds a bit how I feel about all of this). I will look at Interactive. I saw an older post mentioned tastyworks allowed a non resident to open an account so I may explore both avenues. Thanks again.

This is not a workaround - but others may find the article useful and it appears to have a search tool to find the UK equivalents of a US ETF:

https://www.justetf.com/uk/academy/us-etfs-how-to-buy-the-best-equivalent-etfs-in-the-uk.html

I have looked into this extensively and would suggest

- Do not buy the UK versions of the ETFs - these may be PFICs which are a world of reporting pain
- Most US or UK wil not sell the US versions of these ETFs if you are resident in the UK or EU.

I had sucess in opening account at tastyworks.com who will sell the US versions (VOO, VTI etc) to UK residents. I had to contact their support and they told me to open the account using their US address and then change it to my own afterwards. A bit strange but it worked fine in th end. 

I do wonder, given the current state of the IRS and their reported backlogs, whether they even possess the resources or ability to investigate through examination potential reporting violations around ETF investments. I personally feel the risk of examination is so infinitesimally small that it may be a risk worth taking?

When you read about the IRS intentionally destroying 30 million paper filed information return documents because of their inability to process them, I do have to ask 'are they really going to go after John Smith, who has filed his 1040, paid whatever taxes his return shows and has disclosed investments and bank accounts and income through Form 8938 and FBAR reporting"?

I've had the experience of a long drawn out IRS examination during Covid and while it was frustrating (because of the time it took), I completed the process feeling that  I knew far more than the IRS agent from the IRS Large Business and International Unit. The examination occurred in the first place because I filed an amended return (1040X) arising out of an HMRC interpretation of a significant Capital Gain that occurred a few years ago.

I have a number of UK issued ETF's that I hold within my SIPP that closely mirror US ETF's. I take a treaty position in my filing and I'm not going to lose any sleep at night worrying about if I've disclosed enough information to the IRS. I may be sailing close to the wind (in terms of 3520 reporting), but as I will be disclosing income from my SIPP when I go into drawdown, it's a chance I'll take.

The following article, from Buzzacott gives me some comfort that the IRS is heading in the right direction:

https://www.buzzacott.co.uk/news/irs-revenue-procedure-2020-17-changes-to-foreign-pensions-for-us-taxpayers-or-not

I agree that in your situation I would continue as you are since they are already in a SIPP wrapper. But the OP had mentioned withholding tax and when that happens you are guilty until you prove innocence.  The IRS seem to be putting the burden of their work onto the broker more and more and this is where them problems can arise.

I also agree we are sometimes more concerned about getting things 'right' than the IRS. I had my taxes done this year by two different accountants at Greenback and they came up with different approaches and different tax bills. I selected the one was simpler and gave a lower tax bill - guess which one I chose...