401k/IRA investments for US/UK dual citizen domiciled in UK

Can anyone tell me if there are any nasty issues with the types of investments that a US/UK dual citizen domiciled in the UK holds in tax deferred retirement accounts like IRAs in the US and a Personal Pension Plan in the UK. I've always understood that as a Uk/US dual citizen domiciled in the UK it's a bad idea to invest in mutual funds as there can be nasty tax consequences, but do these consequences extend beyond the wrapper of a retirement investment?

This is probably a question that you would want to ask of a tax professional & financial adviser versed in US/UK resident investments.

An IRA under UK domestic law is normally seen as taxable by the UK.  A UK personal pension may be a foreign trust under US domestic rules.

An IRA under UK domestic law is normally seen as taxable by the UK. 

Do you mean even before any money is taken from it? I can see that if I take money out of the IRA I will have to pay income tax on it in the UK and or US, but are you saying that 401k and IRA gains are taxed by the UK even though they are in a retirement account? I asked my question as I was hoping to invest in equity and bond mutual funds inside my retirement accounts and have the fixed income part of my portfolio, CDs and interest baring accounts, in my after tax investments to avoid the issues with foreign pooled investments.

401k plans and IRAs are treated like UK company pensions, either under UK tax legislation (former) or via the double tax treaty (latter). 

Otherwise, UK personal pension plans or UK mutual funds/pooled funds will be treated as PFICs in the US and are fairly punitive.  If you invest in US mutual funds without distributor status in the UK, you will not receive the favorable cap gains rate -18%- and instead are taxed at ordinary rates - as high as 40% this year and 50% next.

401k plans and IRAs are treated like UK company pensions, either under UK tax legislation (former) or via the double tax treaty (latter). 

Otherwise, UK personal pension plans or UK mutual funds/pooled funds will be treated as PFICs in the US and are fairly punitive.  If you invest in US mutual funds without distributor status in the UK, you will not receive the favorable cap gains rate -18%- and instead are taxed at ordinary rates - as high as 40% this year and 50% next.

401(k) and IRAs can only be treated as pension plans under the UK/US tax treaty if a UK tax return is filed claiming this treatment.  Since very few such treaty claims are filed, the majority of IRAs are not protected from UK tax by the tax treaty.

Most folks now seem to believe that UK personal pensions are typically foreign trusts requiring annual US filing - which may (or may not) themselves "contain" PFICs.  Professional advice from a dual US/UK qualified tax adviser would be prudent.

401(k) and IRAs can only be treated as pension plans under the UK/US tax treaty if a UK tax return is filed claiming this treatment.  Since very few such treaty claims are filed, the majority of IRAs are not protected from UK tax by the tax treaty.

I don't agree with this and have not seen this restriction.  YMMV.

Agreed re that personal pension can also be trusts or PFICs. Best to be avoided, if it can be.

Sara - now I am confused?  If someone does not file electing to use the tax treaty in the UK then logically we are back to the pre-2004 treatment (ie pre-current treaty) where HMRC regarded an IRA as a moneybox (in most cases) and taxed everything within it (if the remittance basis was not in point)?

This is 100% in line with HMRCs guidance - even if ignored by the vast majority of folks here in the UK with treaty-protected non-UK pension plans.

I suggest a dual US/UK qualified adviser precisely because these things are complex and professional advice provides comfort.

There are plenty of things where the HMRC guidance does not align with the treatment as laid out in the double tax treaty.  And as I am sure you are aware with tax, there are different interpretations and experiences.  Not sure why you have a problem with this.  I am simply stating where my experience is different from yours.  In your earlier post you didn't even acknowledge that an IRA could be non-taxable in the UK.

And anyone reading my posts, or yours, can feel free to take it on board or disregard.  After all, we are just on an internet forum giving advice.

This is definitely a minefield. I'm a UK/US dual citizen living in the US and with US retirements and after tax accounts, no money in the UK yet.

I'll be retiring back to the UK and I've been planning to leave my retirement accounts in the US and use the tax treaty to keep them tax deferred in the US and UK until I take income from them. That way I figure I'll be able to invest in low cost mutual funds without having to deal with the offshore investment issues. Of course I'll declare income from them in both countries taking the required credits etc. on my taxes.

Right now I'm putting as much as I can into a ROTH IRA as that will grow tax free and also be tax free in both the UK and the US when I take money out, according to my reading of the tax treaty.

Right now I'm thinking of how to invest my after tax money and as a UK/US citizen in the UK it looks like pooled investments (mutual funds, unit trusts etc) of any kind will be just too much trouble.

As I can invest in the stock market in my US IRAs I'll use the after tax money as the fixed income part of my portfolio and just set up a 5 year fixed interest saving account ladder in the UK. No pooled investment or capital gains to worry about, just interest from a bank savings account.