US Citizens investing in the UK?

This all stems from the US being the only country to tax on citizenship and not residency.

One of the big reasons why my husband, while he has a green card, will never get his US citizenship. He doesn't really want it anyway.

Very, very interesting discussion here.

Carrie is thinking extremely sensibly about long-term savings.  I can see she has already put money aside in IRAs and 401(k)s and wants to continue once back in Wales.  The good news is that the UK does have tax-sheltered savings (including ISAs, pensions and National Savings certificates).  Even better since Carrie does not sound as if she will become domiciled in England & Wales she can save outside of the UK (eg in the Isle of Man which is close to Cardiff) and pay no tax at all on interest, dividends and capital gains, providing the investment income is not brought to the UK.

The only thing that Carrie needs to be certain of is that she does not buy (and is not sold) and kind of collective investment in the UK or offshore (including unit trusts, investment trusts and OEICs) because the US tax rate on selling these is a minimum of 35% and no maximum (so theoretically US tax could be greater than 100%).  In addition the annual reporting with US tax returns is horrid.

Jules - however - has an even bigger headache.  Because her husband has a US green card he is subject to US tax on worldwide income in the same way as a US citizen.  Therefore he is presumably filing annual US tax returns (or more likely Jules and he are probably filing jointly each year).  However because he is domiciled within the UK he cannot invest offshore and save tax, so he faces double taxation; even having to pay US tax on interest credited on UK ISAs, premium bond and UK lottery winnings etc.  Worse luck he also should not invest in UK unit trusts, investment trusts and OEICs (even wrapped in a UK ISA)...

Carrie is thinking extremely sensibly about long-term savings.  I can see she has already put money aside in IRAs and 401(k)s and wants to continue once back in Wales.  The good news is that the UK does have tax-sheltered savings (including ISAs, pensions and National Savings certificates).  Even better since Carrie does not sound as if she will become domiciled in England & Wales she can save outside of the UK (eg in the Isle of Man which is close to Cardiff) and pay no tax at all on interest, dividends and capital gains, providing the investment income is not brought to the UK.

I got the impression that Carrie was a US citizen, if so wouldn't she still have to pay US tax on any investments? Also I didn't think that being domiciled in the UK stopped you from investing overseas, just that it removed the advantage of deferring UK tax until the money is remitted to the UK.

The only thing that Carrie needs to be certain of is that she does not buy (and is not sold) and kind of collective investment in the UK or offshore (including unit trusts, investment trusts and OEICs) because the US tax rate on selling these is a minimum of 35% and no maximum (so theoretically US tax could be greater than 100%).  In addition the annual reporting with US tax returns is horrid.

Agreed

Jules - however - has an even bigger headache.  Because her husband has a US green card he is subject to US tax on worldwide income in the same way as a US citizen.  Therefore he is presumably filing annual US tax returns (or more likely Jules and he are probably filing jointly each year).  However because he is domiciled within the UK he cannot invest offshore and save tax, so he faces double taxation; even having to pay US tax on interest credited on UK ISAs, premium bond and UK lottery winnings etc.  Worse luck he also should not invest in UK unit trusts, investment trusts and OEICs (even wrapped in a UK ISA)...

Would it be possible for Jules to continue to invest in US mutual funds, pay US capital gains and then offset these against the UK capital gains taxes. Also if unit trusts aren't a good tax option what about individual stocks and bonds and UK government savings certificates?  Finally is it ok to invest in unit trusts inside a Stakeholder Pension Plan?

Several UK investments are not available to US citizens or residents because of SEC regulation.  Others would be foolish to choose because of the tax consequences (either UK or US). 

What type of UK investments would be *illegal* for a US citizen (as opposed to just being unwise?) And why would they be illegal?

A link to a page on sec.gov would be fine.

What type of UK investments would be *illegal* for a US citizen (as opposed to just being unwise?) And why would they be illegal?

A link to a page on sec.gov would be fine.

I don't think any of the usual ones available in the UK would be illegal, but some like Unit trusts and open ended trusts etc would
be unwise because of the high US tax due on them and rediculours reporting required. It seems the best thing to do if you are a US citizen resident in the UK is to invest your money back in the US as you will generally be liable to UK tax on your overseas investment and pension income only to the extent it is brought into or 'remitted' to the UK and being a US citizen you are always liable to tax on your worldwide investments.

I have seen some offshore companies that offer "Deferred Annuities" as a way for US citizens to invest offshore and avoid tax, but you can buy these in the US and you would only do that after you've maxed out all the other tax deferred US invetsments like 401k, 403b, ROTH and traditional IRAs. If you want to invest after tax it seems the best way for a US citizen resident, or even ordinarily resident or domiciled, in the UK is to invest the money in US investments. Of course if you are domiciled in the UK you'll have to pay US tax and the UK tax, but reduced by the amount you paid to the US I think.

The IRS is a lot less "friendly" when it comes to foreign investments compared to the Inland Revenue.

I'm a complete amatuer at this stuff so don't take my word for this. I'd recommend getting an advisor if you seriously want to pursue invetsing as
a US expatriate.

Dear nun and sweetpeach

To take these in order:

1. Carrie is indeed a US citizen and taxable on worldwide income and gains in the United States.  The reason why I said she could invest outside of the UK (eg offshore or back home in the US) and pay no tax at all was based on her facts and circumstances.  She currently has her savings wrapped in a 401(k) and IRA.  Her compensation once she is in the UK will lead to zero US tax because of the foreign earned income exclusion and foreign tax credits.  The only income that might be taxable in the US would therefore be investment income that is not US tax sheltered.  Assuming that she avoids PFICs any such income will almost certainly be covered by the annual exemption and the standard deduction.  Hence zero US tax.

2. Jules is extremely unusual in being domiciled within the UK.  The tests for changing domicile are very stringent, requiring relinquishing connections with ones previous domicile and acquiring similar connections with the new domicile.  A leading tax case on this (from the beginning of the 20th century) related to a Canadian lady who was certain she would leave the UK and return to Canada if (and only if) her husband pre-deceased her.  The Courts held that she was still domiciled within Canada.  Similarly Jules may feel that if she was to be widowed and in need of comfort she would go home for comfort to family in the US.  If so she is not domiciled here yet.  Domicile is a highly complex subject and one of my specialties.  The word does not have its ordinary English meaning when discussing tax.

If Jules acquired US mutual funds as a UK domiciliary and sold these any gain would NOT be taxed as capital gain.  Instead it would be taxed here at up to 40%.  The long-term US rate is however only 15% so the UK would want the difference (ie up to an extra 25%).  If, having thought again, Jules is actually non-UK domiciled then the up to 40% UK tax would only apply if the gain was remitted to the UK.

3. The reason I said that many UK investments are not available because of SEC regulation is because the majority (maybe all?) UK mutual fund families will not handle US investors because the fund managers would have to comply with SEC filings. There is long-standing discussion on this topic; e.g. http://www.sec.gov/rules/interp/33-7516.htm , and
http://www.law.duke.edu/journals/dltr/articles/2001dltr0007.html
The subject also features in articles in the Financial Times occasionally.
Neither Jules nor her husband should sensibly invest in collective investment products (such as unit trusts, investment trusts and OEICs -- whether or not wrapped in an ISA) because the US tax filing requirement is horrendous, and the US tax rate on sale could easily be greater than the profits made...

4. Deferred annuities are common domestically within the United States.  There was a fashion to sell these offshore as well (aimed at US residents) some 2 to 5 years back.  I would be very concerned about the personal portfolio bond rules in the UK these days (which charge a deemed 15% growth each year to UK tax) even if the personal portfolio bond rules are not in play.  From a tax (not investment) perspective I wsould avoid these.  If you want pure term life insurance (whole life), then do buy that in the States as it is far cheaper.

nun is lucky enough to have his own adviser so will be able to field questions at that person.  Folks such as Jules and sweetpeach would also benefit from personal advice if they do not already have dual-qualified US/UK advisers.

I think this has been a very interesting discussion and I hope that US citizens coming to the UK
will use it to avoid tax pitfalls, particularly buying UK based unit trusts (mutual funds). If
you will only be resident in the UK it seems a good idea to keep your US mutual funds and
keep investing in them.  The question of stock investing is something that hasn't been touched on,
but I'll ask my friendly and well renumerated tax advisor about that one.

I'm sure there are quite a few people like myself or Jules who are British by birth, have aquired US citizenship
or are long term Green Card holders, and want to return home to the UK permanently. Their family
connections, birth in the UK, and selling of a home in the US and buying one in the UK probably mean
that they would have UK domicile again. We fall into a double taxation trap and are limited in our investment
choices. In coming back to the UK we have to accept reporting to both the IRS and the Inland Revenue and the
different way the UK taxes investment gains, we also should not buy UK unit trusts.

Refering to Guya's last email if I invest in US mutual funds I'll have to pay 15% US capital gains. and
as MA was my last state of residence I assume I'll have to pay 5% for LT capital gains. MA state tax
I believe that I'll ahve to declare the capital gain in the UK as income,
but I'll be able to take a tax credit for the US taxes paid, so I'll just end up paying what I should as a UK
tax payer. The 22% basic tax rate in the UK goes up to GBP 33000 and my income will be less than that so I'll end up paying an additional 2%. Not great, but that's the cost of leaving the US.

One idea (sorry Guya, tell me where to get off if this is a silly one) that I've had recently might be of interest
to people with IRAs resident in the UK. Many US citizens in the UK will have zero US income due to the $80k earned income exclusion. So could you convert your IRA to a ROTH IRA and pay very little tax. 10% on conversions up to $7300 and 15%
up to 29700 (and that's after personal exemptions). Now when you tay your retiremeemt money out its tax free in the US
and I think also in the UK, if you are still there by that time.

2. Jules is extremely unusual in being domiciled within the UK.  The tests for changing domicile are very stringent, requiring relinquishing connections with ones previous domicile and acquiring similar connections with the new domicile.  A leading tax case on this (from the beginning of the 20th century) related to a Canadian lady who was certain she would leave the UK and return to Canada if (and only if) her husband pre-deceased her.  The Courts held that she was still domiciled within Canada.  Similarly Jules may feel that if she was to be widowed and in need of comfort she would go home for comfort to family in the US.  If so she is not domiciled here yet.  Domicile is a highly complex subject and one of my specialties.  The word does not have its ordinary English meaning when discussing tax.

If Jules acquired US mutual funds as a UK domiciliary and sold these any gain would NOT be taxed as capital gain.  Instead it would be taxed here at up to 40%.  The long-term US rate is however only 15% so the UK would want the difference (ie up to an extra 25%).  If, having thought again, Jules is actually non-UK domiciled then the up to 40% UK tax would only apply if the gain was remitted to the UK.

No I am confused, thought I was domiciled living over here like everyone else (US citizen, married to a Brit and living/working in the UK).  Ok since its a grey area does this mean that I should not apply for British Citizenship. Will this just make my tax situation even more complex if I do?  This is unreal. Say many years from now I want to cash in my mutual funds and retire in the UK and the UK will tax me 40% on my gains. That is criminal madness to me.  Are there ways around this via a tax adviser.  I sure hope so.

Thanks again for your advise!!

No I am confused, thought I was domiciled living over here like everyone else (US citizen, married to a Brit and living/working in the UK).  Ok since its a grey area does this mean that I should not apply for British Citizenship. Will this just make my tax situation even more complex if I do?  This is unreal. Say many years from now I want to cash in my mutual funds and retire in the UK and the UK will tax me 40% on my gains. That is criminal madness to me.  Are there ways around this via a tax adviser.  I sure hope so.

Thanks again for your advise!!

I don't think you are domiciled in the UK.  I am a dual UK/US citizen, born in England, and my domcile, even though I am living in the UK, is not the UK.  Since, I have been here, I have only been investing into my 401(k) and Roth IRAs back in the States and nothing here as I could fall into all the tax complications that come with it.

You have hit the nail on the head.  Being resident in the UK, owning real estate here, being a UK citizen, setting up UK pension funds, having a UK driving licence etc etc do NOT make anyone domiciled within the UK.  What makes one domiciled here is much more subjective; it is based on intention.

Jules is a US citizen.  Therefore she'll have to file US taxes for ever.  Her husband has a US green card.  Therefore he will also have to file US taxes for ever.

If Jules has US mutual funds and wants to remit the gains on sale to the UK then it is indeed possible to plan to minimise UK taxes as she hopes. The thing that would be "criminal" would be to remit the proceeds to the UK and evade paying UK tax if it is due. This is why I always recommend tax advice from a dual-qualified adviser.

Jules also has problems on death because as she has a different domicile from her husband he can only leave her the first £55,000 of assets (plus the nil rate band) free of UK inheritance tax.  Similarly Jules can only leave assets to her husband if she sets up a special type of trust (commonly referred to as a QDOT) for the benefit of her surviving non-US citizen spouse.  Drafting Wills in these circumstances is always best left to a specialist.

Her husband has a US green card.  Therefore he will also have to file US taxes for ever.

If you leave the US your green card is only valid for 1 year.  If you stay abroad longer than that you lose your residency.  Certainly loss of residency/loss of ability to freely enter and remain in the US must free you from being domiciled within the US.  Yes?

One more question - I looked through the list of tax advisors on the link Nun provided.  They are all in or around London.  Does anyone know if you have to actually make initial and annual trips to visit them, or can much of the work be done by mail, email and telephone?

Thanks.

One more question - I looked through the list of tax advisors on the link Nun provided.  They are all in or around London.  Does anyone know if you have to actually make initial and annual trips to visit them, or can much of the work be done by mail, email and telephone?

Thanks.

I have never visited my dual qualified accountant in Hertfordshire.  Everything has been done through the post, email and phone.

One more question - I looked through the list of tax advisors on the link Nun provided.  They are all in or around London.  Does anyone know if you have to actually make initial and annual trips to visit them, or can much of the work be done by mail, email and telephone?

Thanks.

You can do a lot via the phone, correspondence and email, but I think if you can see someone face to face
before you hire them you should as you should feel comfortable with the person who is handling
your tax advise. Then an annual visit would be good if possible.

Make sure your advisor has all the right professional qualifications and ask for references.

Finally educate yourself, you need to understand the advise you are given as ultimately you are responsible
for your tax advice. I've asked a lot of questions here and Guya and Lizzit have given me lots of information
and corrected many of my misapprehensions, thanks to them. Now I feel a bit more confident in being able to ask the right
questions of an advisor and as important know that they are asking me the right questions.

The list that nun linked too is interesting.  For instance I am not listed there at all (and indeed several other US tax advisers I know are also missing).

I would gladly talk with anyone if you send me a private message.

Any tax adviser these days needs to identify his/her customer for UK money laundering purposes.  The Institute of Chartered Accountants in England & Wales recommends a personal meeting, although this is not always necessary.  The adviser must obtain confirmation of both identity and address (just like a bank); or the adviser could end up in jail.  Because of these rules, most tax advisers now like to meet their clients if possible.

Domicile is extremely complicated, and not related to nationality, residence for UK or US immigration or passports.  Tax rules can be even worse!

For instance. unfortunately whether or not a green card is valid for immigration purposes has no effect on US tax.  For US tax purposes a US green card holder is still subject to worldwide US taxation until both the green card has been officially surrendered the to a US consular officer AND a SPECIAL tax return for the year the green card was given up has been filed.  (In some circumstances US tax returns also need to be filed for the 10 years after the green card is given up even after these actions.)