US Citizens investing in the UK?

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).

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.)

I think there is a "long term residence" criterion that's applied to Green Card holders, something like having been a US resident for 8 out of the last 15 years.  Here is something I found about just how hard it is to give up that Green Card (for tax purposes anyway). These rules my seem
terrible, but actually I don't think most people will have too much US tax to pay because of the foreign earned income exclusions and the
existance of tax treaties that eliminate most double taxation. The important thing is to have a plan and comply with the law, it might be a pain to have to file these taxes and as a Green card holder you might think "heck what right does Uncle Sam have to follow me home", but a bit of time spent filing forms will avoid the potential of fines and will probably cost you very little if anything in extra tax

Expatriation rules
US citizens who renounce their citizenship and long-term residents (defined as individuals who have had a green card for eight out of the past 15 years) who surrender their green card with a principle purpose of avoiding US taxes are subject to an alternative tax regime for the 10 years following the expatriation. Under this regime, the individual is subject to US tax on a broad scope of US source income generally at tax rates applicable to US citizens. Whether tax avoidance is a principle purpose for expatriation is a subjective determination, although certain individuals are treated as having such a principle purpose based on the individual’s US federal tax liability for the five preceding tax years or the individual’s net worth on the date of expatriation.


A tax avoidance motive is presumed if the following tax liability or net worth tests were met:

    * the individual had an average annual net income tax liability in excess of US$124,000 for the five-year period preceding the date of expatriation; or
    * the individual had a net worth of US$622,000 or more on the date of expatriation.

The act introduces significant changes to the expatriation provisions effective to persons who expatriate after June 3, 2004. Changes include:

    * Objective standards replace the subjective standards to determine whether the expatriated individuals are subject to the alternative tax regime.
    * An expatriated individual will continue to be treated as a US resident until the individual gives notice of an expatriating act or termination of residency to the Secretary of State or the Secretary of Homeland Security, and provides a statement under Section 6039 (G).
    * The net worth test (as described) will increase to US$2 million from US$622,000, but it will not be adjusted for inflation. The average tax liability figure of US$124,000 referred to above will be indexed for inflation.
    * An individual subject to the alternative tax regime will be required to file a tax re- turn for the 10 years following expatriation regardless of whether any US federal income tax is due. The penalty for noncompliance is US$10,000.
    * An expatriated individual subject to the alternative tax regime who is physically present in the US for more than 30 days in any given calendar year during the 10-year period following expatriation will be subject to full US federal taxation in that year.
    * Even if the individual is below the threshold of tax liability or net worth tests, he or she must still certify, under penalties of perjury, that they have complied with all of the US federal tax obligations for the preceding five years. In addition, evidence of compliance may be required.
    * Gift taxes will apply in some situations.

The ongoing filing obligations can put a significant administrative burden on individuals relinquishing their US citizenship or US residency in the case of expatriates.
From a US federal tax perspective, a nonresident alien individual entering the US should consider obtaining a visa other than a permanent residence visa (green card). If an individual obtains a green card, such individual should avoid becoming a long-term resident by not being taxed as a resident for more than seven years.

nun - you are both correct and incorrect.  The tax burden after expatriating is indeed typically small unless the majority of assets are held in the US.  However the foreign earned income exclusion is no longer relevant and no treaty at all can be used to over-ride the expatriation provisions.

The summary you have posted is OK (if a little old), but anyone contemplating renouncing a green card or US citizenship should take individual tax advice.

nun - you are both correct and incorrect.  The tax burden after expatriating is indeed typically small unless the majority of assets are held in the US.  However the foreign earned income exclusion is no longer relevant and no treaty at all can be used to over-ride the expatriation provisions.

The summary you have posted is OK (if a little old), but anyone contemplating renouncing a green card or US citizenship should take individual tax advice.

Thanks Guya, what I was saying in the first part of my post that was for 99% of people exparitation isn't worth it as if you stay "patriated" you can
use things like the foreign earned income exclusion and tax credits to reduce your US tax liability greatly. So if you are a Green card holder having
to file IRS forms the most it will cost you is probably the time and effort of filling in the forms, or paying someone to do it.

How hard was it to find an IFA who knew about US/UK taxes?  I'm going to be living near Cardiff and am worried that we won't be able to find anyone near us.  I'm also worried that most will have minimum portfolio values in order to work with you.  I have a good 401(k)/IRA for a 26 year old, but it's not big enough to meet the minimums of most advisors in my area in the US.  And it is going to be staying in the US.
 

Carrie, I'm at the stage of initial consultation with my tax specialist and so far I'm happy as they have given me a big form to
fill out that asks all the right questions about my personal plans and circumstances and where my funds are and what they are.
I've also exchanged a few emails and had two long phone conversations which have resulted in what I think is a reasonable
quote (650 GBP) for some detailed analysis and planning. I've used the knowledge I've gained on this forum to outline the issues and areas I need them to cover and they suggested a few others like inheritance issues. The quote is in the middle of the range I received, some were way more and some less. I'd imagine that a good professional should charge between 100 and 200 pounds/hour, if they are similar to US professionals. If I'm happy with what that money gets me I'll retain the accountant on a more permanent basis.

One thing that has occured to me with your situation regards your 401k/IRAs, you might be able to convert some of your IRA to a ROTH IRA without paying any tax. This sounds too good to be true,  if I'm right the tax guys out there will have thought of it and will advise you to do it. If I'm wrong,  they will tell you it carn't be done. I'll see what my tax person says when I suggest it.

As you may know a ROTH IRA is paid with after tax dollars, but when you take dollars out at age 59 1/2 everything (even the gains) in the account is tax free, great eh!  With a regular IRA you defer tax on the contibutions and have to pay income tax on the distributions at 59 1/2. Whether one is better than the other depends mostly on the differential between your pre and post retirement tax rates, but if you could convert the IRA to a ROTH without paying any tax that would be sweet.  As a US citizen resident or ordinarily resident in the UK you don''t have to pay tax on any unremitted foreign funds so the idea is that each year you convert an amount of your IRA ,equal to your US  personal exemptions and deductions, to a ROTH IRA. You will have zero net US income, hence no tax and you've taken that tax deferred IRA money and converted it to a ROTH which is entirely tax free. Also no UK tax implications because IRA money which is classed as income in the US was not remitted to the UK.

Like I said I think I'm missing something here as it seems too good to be true, but it was an interesting thought experiment.

I've started contacting some dual certified accountants/tax specialist.  I'm inclined to stall for a little while, as my husband is still job hunting over there and I didn't anticipate this expense.  But at the same time I don't want to leave it too long, because I wonder if I shouldn't get some advice prior to leaving the States.  I am currently living in New York State, not the most taxpayer friendly place.  I also need to figure out what has to be done to un-domicile my husband, hopefully in time for next tax year.

nun - I'm glad you started this thread because, while I'd being doing my research on investing for retirement in the UK, I'd never considered the tax implications of these things for US citizens.  guya had warned me on another thread, but apparently I need to hear things more than once before they really start to sink in.     Oh, to be from a country that taxes based on physical residency.

Dear nun and sweetpeach


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.

Oh, this makes more sense now. Thanks.

Nun, I'd be very interested to hear your suggestion of transferring Trad. IRA to Roth IRA, we're going through this exact scenario this year.
Additionally, DW who used to have a green card which was handed over to immigration authorities in 2002 because we moved permanently to the UK could be affected by this rollover.  She also hasn't filed taxes since 2002 although it sounds like she is safe as she lived in the US for much less than 8 years.

Guya, I've seen you mention the issue of Americans investing in UK unit trusts, OEICs being bad choices due to high US taxation.  Does a Tracker fund fall under this as it is not a direct investment in equities but simply an index of these things?  What can one do if they invested in unit trusts, OEICs etc for a number of years in this situation?  Would you have to file some kind of amended return and pay back tax?  Or would you just unwind the contributions?

Thanks,
Matt

I do not think there is a straightforward answer here.

1. If you are not UK domiciled then the rollover for you (if allowed in the US) should be OK providing that you claim treaty relief in the UK.

2. DW has expatriation issues to sort out from a US tax perspective?  Does she have written INS agreement of the date that she expatriated.  If so what date did they say?

3. DW is presumably domiciled within the UK so was declaring the income accumulating within the IRA on the UK tax returns after she moved back to the UK?

4. If you have filed incorrect US returns failing to include forms 8621 for foreign collective funds then you should amend each return.  Depending on how the ownership is "wrapped" you may also need to file amended forms TDF 90-122.1 for each year.  You should be aware that penalties for each of these failures are potentially $10,000 per form minimum (jail if willful).  I suggest you employ a dual qualified UK/US adviser to represent you who will be able to negotiate on these issues.

... transferring Trad. IRA to Roth IRA, ...

Roth IRA transfer warnings:  The new tax law passed 17 May 2006 will affect your transfers. 

1)  The Foreign Earned Income Exclusion (FEIE) add-back will put the transfer into a hgiher tax bracket.  For example, if you had transfered in 2005 and had wages of $80,000 and rollover of $5,000, the $10,000 is taxed at the 10% band rate.  A transfer in 2006 will result in a 28% rate.

2)  Don't forget MAGI (Modified Adjusted Gross Income) when transfering.  There is an income limit of MAGI; if your MAGI is above the allowable limit, you can't do a conversion.  To compute MAGI, you add back the FEIE; this may scupper a transfer.

3)  In 2010, conversions from regular to Roth IRAs will be allowed irregardless of MAGI. 

IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

1. If you are not UK domiciled then the rollover for you (if allowed in the US) should be OK providing that you claim treaty relief in the UK.

I guess I'm not domiciled.  I mean, I've been living in England for 4 years and don't have plans to move back but it sounds as though I would still be considered US domiciled for tax purposes.

2. DW has expatriation issues to sort out from a US tax perspective?  Does she have written INS agreement of the date that she expatriated.  If so what date did they say?

We moved from US to UK in June, 2002.  I believe it was later that year INS confiscated her green card and put into their computer that she had willingly given up her permanent residency status.  I don't think we were given a form or anything but the INS officers said that her residency status was forfeit.  So we assumed all ties had been broken.  Her last US tax return would have been for 2002.

3. DW is presumably domiciled within the UK so was declaring the income accumulating within the IRA on the UK tax returns after she moved back to the UK?

I guess she is UK domiciled?  I can't say I have a full grasp of the domicile thing but she is British and does live here.  She's never filed a UK tax return in her life.  She's never made enough money.  As I understand it, most people don't file in the UK unless the Inland Revenue asks them to or they make a lot of money.

4. If you have filed incorrect US returns failing to include forms 8621 for foreign collective funds then you should amend each return.  Depending on how the ownership is "wrapped" you may also need to file amended forms TDF 90-122.1 for each year.  You should be aware that penalties for each of these failures are potentially $10,000 per form minimum (jail if willful).  I suggest you employ a dual qualified UK/US adviser to represent you who will be able to negotiate on these issues.

I've sent in the TDF forms each year.  Is the IRS really only interested in those accounts with values of $10,000 or more?  Or do they want to know about a current account with £2.50 hanging around?  If you had, say, 50 accounts - various current accounts, savings accounts, ISAs, etc, do they want to know about each and every one of them?

Good luck finding an IFA who understands your particular situation.

If you're a US citizen domiciled in the UK it amazes me the issues with investing. As a
UK citizen domiciled in the US there are no problems at all as long as you don't own any foreign funds.
This all stems from the US being the only country to tax on citizenship and not residency. I'm in
a great Catch 22 situation being both a UK and US citizen and planning on being domiciled in
the UK. It looks like my US citizenship makes investing in UK based funds difficult and my domicile
in the UK will mean that I'll have to pay UK tax on investments in the US (I expect there to be offsets
for US tax paid though). As I don't think its actually illegal for a US citizen to buy UK funds, I'll
probably open an account in the UK under my UK citizenship if the tax situation isn't too
bad. There is some nasty reporting to do, but I have a tax advisor and now they can earn their money.

Just an observation, I'm amazed by the answers I got to my question. I had expected to get a
few from people who were buying funds in either the UK or US, but apparantly nobody is investing any
money........

Guya, I'm no expert but what you said here isn't true.  You can claim the remittance basis for only 7 years, and then you do pay UK tax on interest, dividends, capital gains, etc, on US investments.  Even if you don't remit it.  I do think there is a £2,000 overseas income threshold you have to cross first.  But after that, the UK taxes all of your overseas gains.

The majority of US citizens who are resident in the UK are not domiciled within the UK.  Consequently they can invest outside of the UK and pay no UK tax on interest, dividends, capital gains etc providing that the investment income is not brought to the UK. 

This is a standard tax planning technique, which I frequently advise on in my day to day existence.

For longer-term savings there are several classes of assets available, including stocks, bonds, commodoties, real estate, precious metals, cash, insurance policies and other collective investments.

Depending on family size, nationalities, personal expectations etc the correct investment will differ in each case.  Investment advice in the UK can only be given by an Independent Financial Adviser (IFA) authorised by the Financial Services Authority (FSA).  An FSA registered adviser will him/herself want to protect his/her liability by ensuring that advice given will not cause any adverse tax effects.  The first place to start seeking investment advice has, therefore, got to be an IFA.

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). 

I note that nun already has appointed a personal tax adviser so will be able to get full tax advice from that person since s/he will have full knowledge of nun's circumstances.  If any further explanation would assist others, please shout!  No question is stupid! 

Guya, I'm no expert but what you said here isn't true.  You can claim the remittance basis for only 7 years, and then you do pay UK tax on interest, dividends, capital gains, etc, on US investments.  Even if you don't remit it.  I do think there is a £2,000 overseas income threshold you have to cross first.  But after that, the UK taxes all of your overseas gains.

It was true at the time. Guya's post is from 2006. The law has significantly changed since then.

Dear all,

I run MASECO Private Wealth - a weatlh management firm specialising in helping US citizens living in the UK.  Please take a look at our website
 
newcomer link: http://www.masecopw.com [nonactive]

and let us know if you have any questions.  We were set up with the ambition to help Americans with the complexities of investing with two tax jurisdictions looking over your portfolios.

James