UK taxes on distributions from 529 plans

Hello!

We are moving to the UK from the US and are trying to figure out what do do with our 529 accounts. We have approximately $80k for each child. We are considering two main options: 1) simply withdrawing and paying the tax and penalties before we leave the US, reducing the effective annual rate of return on these investments from ~5% to ~2.5%; 2) transferring the 529s to a US relative to hold until the kids go to university in the UK (assuming they do!).

Does anyone have experience of practically using 529 plans to pay for education in the UK? In particular, I read an article from a financial planning firm that says: A UK resident for whom a 529 plan pays an expense is likely to be taxed on the income and gains in such a distribution. . See: newcomer link: https://creativeplanning.com/international/insights/financial-planning/problem-with-529-plans-for-american-expats-living-in-the-uk/ [nonactive] . Does this mean if the student claims $20,000 in educational expenses in a UK tax year, the capital gains on that amount will be taxed?

Thank you for any advice you can provide!

Does anyone have experience of practically using 529 plans to pay for education in the UK?

This is not completely answering your question, but the IRS is fine with 529s covering most UK unis. My son went to UK uni - it took a while to find the right person to ask, but they were able to issue a 1098-T. This matched the 529 distribution so no issues. However, son went to UK uni when we were US residents. I don't think IRS would have issues if you were UK residents at the time but I'm pretty sure HMRC would and probably see as taxable income.

Thank you leuler -- yes this is one scenario that could happen for us, so helpful to know how it worked for you.

529 plans are not recommended for UK residents because of the risk they may be considered trusts, requiring trust registration and filing of trust tax returns. If you choose to take the view it is not a trust (which you would naturally disclose to HMRC), the child will report any income, gains or offshore income gains within the plan to HMRC.

Thank you very much Guha.

So just to confirm I understand: even if the plan is held by a US relative, HMRC may regard the UK resident child as a beneficiary of a foreign trust, so that would require the child to complete tax reporting and possibly tax payments on the foreign earnings?

A related follow-up question: Does anyone know roughly how much it costs to pay an accountant in the UK to deal with reporting a 529 foreign trust each year? For example, if it would cost us an additional 1,000 UKP each year to handle 529s (500 quid per kid), and we'd have to do this EVERY year until they finish university, then I can see that it might just make sense to liquidate the accounts, pay US tax penalties and forget about it all.

Thank you!