How do you save/invest money

I've been in the UK for a couple of years now and things are going well. I have a good UK based pension plan that I include on my US tax returns so it'll be US tax free when I take money out of it, but I was wondering what people are doing for after tax saving/investing. When I first arrived I wanted to invest/save a few hundred pounds a month so this is what I did.

1) Opened a saving account with a UK bank
2) Max out contributions to my US ROTH as I figure this will be tax free whether I retire in the UK or the US.
3) I'm saving regularly to a US based index fund. I'm not sure what happens to this if I stay a long time in the UK ie become permanent resident.

I was frustrated by the complex US tax treatment of foreign investments so I'd be interested to learn if anyone has different or better ideas.

What about a Cash ISA or a Stocks and Shares ISA.  You can contribute up to about £3500 in each per year.  The money is more accessible than retirement funds. I am not sure of the tax implications yet, as I just started looking into this. Alternatively, so banks are offering nearly 6.5% on a savings account. 

Sorry, I don't mean to derail your thread, but...

We are supposed to declare our UK pensions on our US tax returns? 

What about a Cash ISA or a Stocks and Shares ISA.  You can contribute up to about £3500 in each per year.  The money is more accessible than retirement funds. I am not sure of the tax implications yet, as I just started looking into this. Alternatively, so banks are offering nearly 6.5% on a savings account. 

I looked at those, but they aren't free of US taxes and you run into complicated US tax treatment of foreign based mutual funds.

We are supposed to declare our UK pensions on our US tax returns?  Huh

Yes, the IRS needs to know about contributions to a UK pension as they count company contributions as income and they want the tax on the money you put in tax deferred. I use my excess foreign tax credits to offset the tax and actually end up having to pay no tax. That's why I take the foreign tax credit rather than the foreign earned income exclusion. The big thing is that the UK pension will be basically US tax free when I take money out. Also as I have US taxable income, but offset my US taxes with my UK taxes, I  don't pay US income tax, but I've still been doing ROTH contributions.

Even if you use the tax treaty to defer US tax on the UK pension contributions they still need to be included on your 1040.

Geez, I better have a word with the woman who helped me prepare my return this year (a volunteer with the Edinburgh Consulate). She told me not to worry about my pension OR my ISA. 

Geez, I better have a word with the woman who helped me prepare my return this year (a volunteer with the Edinburgh Consulate). She told me not to worry about my pension OR my ISA. 

I really wanted to do an ISA, but the IRS doesn't recognize their tax free status so I assumed they'd want to tax any gains

Geez, I better have a word with the woman who helped me prepare my return this year (a volunteer with the Edinburgh Consulate). She told me not to worry about my pension OR my ISA. 

Just to underline my last post - I don't know what the woman at the Edinburgh Consulate is thinking, if you are a US citizen the IRS taxes you on your worldwide income so you have to include everything on your return. The IRS will want to tax any gains in an ISA and you have to pay US income tax on any employer pension contributions, either up front or when you take money out.

Another thing is that if you do an ISA regularly it can grow to over $10k pretty quickly and you have to declare all foreign accounts over $10k to the Treasury Dept.

As I understand it, the interest on Cash ISAs need to be declared on US tax return similar to any other taxable bank account.  So if you have a Cash ISA paying 5%, the full 5% interest payments are to be declared as taxable.  Stocks & Shares ISAs are a different kettle of fish.  Because they invest in unit trusts, OEICS and other collective investments there is a potential for a complicated and very high tax rate to be applied.

One thing I've considered is going through a bank's or investment firm's offshore investment accounts, especially accounts that are US based.  I would have thought this would be relatively easy to do and probably could be as simple as investing 'X' number of pounds each month into an account.  I would imagine this would be tax free on your UK taxes but there would be a US tax liability.

if you are a US citizen the IRS taxes you on your worldwide income so you have to include everything on your return. The IRS will want to tax any gains in an ISA and you have to pay US income tax on any employer pension contributions, either up front or when you take money out.

I took this article on the IRS website to mean that UK pensions fall under tax treaty and, therefore, won't require declaration on US taxes and no tax liability, ie they recognize that this is a tax exempt product for retirement purposes specifically, similar to something like a 401(k).  Is this not the case?

http://www.irs.gov/irb/2005-18_IRB/ar10.html
Agreement Identifies U.K. Pension Arrangements for Tax Treaty Benefits

IR-2005-44, April 13, 2005

WASHINGTON — The Competent Authorities of the United Kingdom and the United States have reached a mutual agreement on the qualification of certain U.K. pension arrangements for treaty benefits under paragraph 3(b) of Article 10 (Dividends) of the Convention Between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation with Respect to Taxes on Income signed at London on July 24, 2001 (“Treaty”).

The agreement constitutes a Mutual Agreement in accordance with paragraph 3 of Treaty Article 26 (Mutual Agreement Procedure).

I took this article on the IRS website to mean that UK pensions fall under tax treaty and, therefore, won't require declaration on US taxes and no tax liability, ie they recognize that this is a tax exempt product for retirement purposes specifically, similar to something like a 401(k).  Is this not the case?

http://www.irs.gov/irb/2005-18_IRB/ar10.html
Agreement Identifies U.K. Pension Arrangements for Tax Treaty Benefits

IR-2005-44, April 13, 2005

WASHINGTON — The Competent Authorities of the United Kingdom and the United States have reached a mutual agreement on the qualification of certain U.K. pension arrangements for treaty benefits under paragraph 3(b) of Article 10 (Dividends) of the Convention Between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation with Respect to Taxes on Income signed at London on July 24, 2001 (“Treaty”).

The agreement constitutes a Mutual Agreement in accordance with paragraph 3 of Treaty Article 26 (Mutual Agreement Procedure).

I believe you are right, you can use the tax treaty to defer US tax on UK pension contributions. However, when you take money out it will be taxable as income in the US, even the 25% that is tax free in the UK.

If you use excess UK tax credits to "pay" the US tax on the UK pension contributions as you put them in income from the pension will be US tax free and you'll also get the 25% tax free UK income too.

Whatever way you go you have to include a UK pension on your return so the IRS knows what you are doing..

However, I'm more interested in what people do with their non-retirement savinsg. Does anyone buy individual stocks with a UK broker?

As I understand it, the interest on Cash ISAs need to be declared on US tax return similar to any other taxable bank account. 

If the ISAs are in the name of your UK spouse (who has never lived in the US) and you file as married filing separately, do they still need to be declared to the IRS?

Hmm, this is all very interesting, and more than a bit annoying. I think next year I'll actually get someone who knows what they're doing to do my taxes, and get me properly up to date. I have five years of contributing to a cash ISA to come clean about (which will soon amount to more than $10,000) 

Interest on cash ISA is taxable to a US person at the marginal US tax rate.  Nonetheless, if there are excess foreign tax credits in the passive basket Form 1116 the US liability might be zero. The account must also be declared on the annual Form TF F 90-22.1.

A UK investment trust/OEIC/unit trust ISA is treated by the IRS as a Passive Foreign Investment Company so subject to mandatory additional US reporting on Form 8621.  The tax on long-term growth is a minimum 35%, plus interest over the period of investment.  So, whether or not wrapped in an ISA these are a “bad thing” from a US tax perspective.

A UK pension plan is not a qualified US plan although one can claim benefits on most US plans to the extent that is permitted by the US treaty.  If one does not elect the treaty then one is required under IR Code section 402(b) to include annual employer contributions as taxable income.  These contributions plus growth (if highly compensated) must be declared as income annually on the US tax return - unless a treaty claim in made on Form 8833. If employer contributions are not claimed under the treaty then these - plus employee contributions- plus reportable growth - form basis for US tax purposes when payments are made from the plan.  To figure the amount of each withdrawal that is taxable one turns to IR Code section 72. Contrary to much misunderstanding, this rarely results in tax-free pensions, but will typically give rise to a reasonably large figure for “basis”.

UK cash ISAs often pay quite decent interest rates, so even after US tax has been paid they should not be dismissed.

Investing “back home” is a far more difficult choice these days because of the new UK rules for “non-doms”.  If you have not been UK resident for 7 of 9 years, there is zero UK tax on US investments providing the non-UK income & gains are not remitted to the UK and the remittance basis is claimed on a UK tax return.  Alternatively there is zero UK tax if the non-UK income/gains are below £2,000 each year. Claiming the remittance basis results in the loss of the UK personal allowance and annual CGT exemption.  Investing back in the States is also more problematic because gains on US mutual funds can be taxed at the 40% rate in the UK because of the UK’s offshore income gain rules.

If the ISAs are in the name of your UK spouse (who has never lived in the US) and you file as married filing separately, do they still need to be declared to the IRS?

No. Or at least that's my understanding.

Investing “back home” is a far more difficult choice these days because of the new UK rules for “non-doms”.  If you have not been UK resident for 7 of 9 years, there is zero UK tax on US investments providing the non-UK income & gains are not remitted to the UK and the remittance basis is claimed on a UK tax return.  Alternatively there is zero UK tax if the non-UK income/gains are below £2,000 each year. Claiming the remittance basis results in the loss of the UK personal allowance and annual CGT exemption.  Investing back in the States is also more problematic because gains on US mutual funds can be taxed at the 40% rate in the UK because of the UK’s offshore income gain rules.

I'll look into a cash ISA as the rates are quite attractive, it avoids nasty PFIC issues and maybe I have enough UK tax credits to offset US tax.

As I've only been in the UK for a couple of years and I don't remit any money here i haven't paid any UK tax on my gains yet, but I'm thinking about what happens after 7 years as the job is working out well and my life is now centered around my new friends, and most importantly girlfriend, here.

I'm only a small investor and I won't have gains more that 30k so I suppose I'll just 
declare my US investments and be taxed by the UK on my worldwide income and gains, as the US does now. As the UKCGT allowance is 9.2 k pounds for a small investor like me I won't be paying much, if any, UK CGT anyway. Buying US based low cost index funds seems to be my best option, as UK funds are out because of PFIC rules and UK shares will be taxed at UK rates so i don't gain anything there and the costs are greater than buying no-load US funds anyway.

One thing I've considered is going through a bank's or investment firm's offshore investment accounts, especially accounts that are US based.  I would have thought this would be relatively easy to do and probably could be as simple as investing 'X' number of pounds each month into an account.  I would imagine this would be tax free on your UK taxes but there would be a US tax liability.

We have a couple of fixed rate offshore accounts that have the fab interest rate of 6.66 p.a. And yes, it's tax free until you take the money 'onshore'. I'd avoid Jersey, though, as growth there is really slowing down and a lot of the island offshore operations are being offloaded.