US/UK citizen and PFIC

As a UK/US dual citizen domiciled in the UK I'd like to invest some money
in UK unit trusts, probably with Fidelity UK. I've read that non-US mutual funds
may be termed by the IRS as a Passive Foreign Investment Company (PFIC)
and that a US person can run into nasty tax implications. What are the US tax
implications for a US citizen domiciled outside the UK in investing in UK mutual funds?

nun - The form required to report these, and the instructions can be found here:
http://www.irs.gov/pub/irs-pdf/f8621.pdf

http://www.irs.gov/pub/irs-pdf/i8621.pdf

The instructions explain in detail how to calculate the tax charge should you choose to invest.

I note that page 7 of the instructions state that the following time will be required for each PFIC:
Recordkeeping . . . . . . . . . . 13 hr., 37 min.
Learning about the law or the form........ 8 hr., 38 min.
Preparing and sending the form to the IRS. . . 9 hr., 14 min.

Bearing in mind that learning about the law requires over 8 hours of time, there is insufficient space in this forum to explain in detail. 

I would also suggest that you check the Fidelity UK prospectus.  Many UK fund managers will not accept US investors because of SEC regulation.

nun - The form required to report these, and the instructions can be found here:
http://www.irs.gov/pub/irs-pdf/f8621.pdf

http://www.irs.gov/pub/irs-pdf/i8621.pdf

The instructions explain in detail how to calculate the tax charge should you choose to invest.

I note that page 7 of the instructions state that the following time will be required for each PFIC:
Recordkeeping . . . . . . . . . . 13 hr., 37 min.
Learning about the law or the form........ 8 hr., 38 min.
Preparing and sending the form to the IRS. . . 9 hr., 14 min.

Bearing in mind that learning about the law requires over 8 hours of time, there is insufficient space in this forum to explain in detail. 

I would also suggest that you check the Fidelity UK prospectus.  Many UK fund managers will not accept US investors because of SEC regulation.

Guya, Thanks for the reply, you confirmed what I'd experiienced reading the regulations.

As you may remember I'm in a slightly out of the ordinary situation being both a US and UK citizen
so I could open an investment account in the UK due to my UK citizenship and then go through the
mark-to-market calculations each year,
So what do US citizens living in the UK do when it comes to investing, do they have to deposit their money
with investment firms back in the US?

FYI I have retained someone with UK and Us tax experience to help me with my planning.

I cannot comment further without knowing the professional qualifications of your current professional adviser, so I can elaborate on areas that s/he may not cover.

I cannot comment further without knowing the professional qualifications of your current professional adviser, so I can elaborate on areas that s/he may not cover.

I'm working with a CPA  and a chartered accountant at the same firm, both worked for a long
time with the international tax divisions of one of the Big 4 firms. I'm happy with them
as they are asking all the right questions

My question was very general, as I assume there are quite a few US citizens Ordinarily resident
in the UK with money they'd like to invest and it seems that the US tax laws make it
a lot more complicated than going down the high street and buying a unit trust from
HSBC, Halifax or Barclay's.

I assume from what you are saying that they are bound by the rules of the Institute of Chartered Accountants in England & Wales and the State where the CPA is licensed.  My recommendation is always to have one person who is dually qualified as against two who happen to be at the same firm.

The rules of the ICAEW forbid me from commenting in detail without their agreement.

Investment matters in the UK, which you are asking about, require an FSA authorised adviser, which I am not and presumably neither of your current advisers are either.

I recommend therefore that you approach an IFA for investment advice.  You will need to tell them that you are a US citizen because the majority of UK collective funds will not accept US citizen investors, because of SEC regulation.

Once you have IFA advice the IFA should also obtain his/her own advice on the US tax position to protect his/her PI insurance.

I assume from what you are saying that they are bound by the rules of the Institute of Chartered Accountants in England & Wales and the State where the CPA is licensed.  My recommendation is always to have one person who is dually qualified as against two who happen to be at the same firm.

The rules of the ICAEW forbid me from commenting in detail without their agreement.

Investment matters in the UK, which you are asking about, require an FSA authorised adviser, which I am not and presumably neither of your current advisers are either.

I recommend therefore that you approach an IFA for investment advice.  You will need to tell them that you are a US citizen because the majority of UK collective funds will not accept US citizen investors, because of SEC regulation.

Once you have IFA advice the IFA should also obtain his/her own advice on the US tax position to protect his/her PI insurance.

Thanks Guya. I don't really need the investment advice, I know where I'd like to put my money, but I want to get the taxation
worked out. My preference would be to have a fair amount of funds available to me in GBP with a few years living expenses invested in fixed income and the rest in a GB tracker/index fund. But it looks like this will be tricky.

The US makes taxation pretty difficult for its citizens. I came to the US in 1987 as a UK citizen and worked for the US Government.
My tax obligations to the UK were none and it was possible for me to have US mutual fund investments both tax deferred and after tax. If you reverse the situation and are a US citizen moving to the UK it seems to be really difficult to invest your savings.

You should probably go over this plan with your US/UK tax advisors, in a joint meeting.  They should be able to suggest a number of tax-efficient ways to make your investment, such as ISAs, increased pension contributions, etc.  Also present at that meeting should be your investment advisor, so that the investment side of the implications of various proposals is fully discussed.  Yes, it costs more than meeting each of these people one-on-one; but you are ready to make a serious investment and you should not go into it lightly.

One problem with IFAs (and US investment managers) is that they are often only licensed to sell Unit Trusts and Investment Trust (or in the US, mutual funds).  This severely limits the scope of their investment advice, since obviously real estate, insurance instruments, company pensions, and direct holdings in stocks are also investments, none of which pay your IFA a dime.  You therefore may want to seek not merely an IFA, but an IFA qualified to sell direct holdings in stocks and offshore- and US-based assets. 

Further, you may wish to hire an IFA who is paid on a fee basis rather than a commissions basis.  This will align his interests (growth in the value of your assets) with yours; rather than pushing the sale of whatever happens to pay the best rates these days.  Yes, yes, I know an IFA is not supposed to do that; but there is no incentive for them NOT to do that other than sticks.  With fee-based compensation, there is a carrot as well.