Investing in the UK

Hi Everyone.

I'm 22 and just starting to have a little extra money around that I want to invest, but I'm a US citizen and UK domiciled and looking through the forums it looks like that's a huge problem.

So I guess my question is, what can I realistically invest in without being heavily penalised by the IRS or HMRC?

I'm so confused right now.

It depends on your tolerance of reporting complexities to the IRS. A cash ISA is the simplest in terms of reporting (and not a stocks and shares ISA). Although the profits are tax free in the UK, they are taxable by the US, but it's simply a matter of declaring them on Schedule B. The maximum allowance for funds deposited to a cash ISA for 2011/12 is £5,340 for the year.

Don't forget about FBAR if your aggregate accounts total more than $10,000.

+1 to OAP.

To the OP are you resident in the UK for tax purposes. You can be domiciled in the UK, but not resident, just make sure you understand your status fully.

Remember that although the US will tax any gains you have on a UK cash ISA, UK tax credits may well wipe out any US tax due.

I've looked into how I'd invest my money as a US citizen in the UK and the simple option would be a long term savings account inside an ISA. As there's only a savings account you avoid the issues with foreign pooled investments and you can still get "good" interest rate or around 4%.

If you have good book keeping skills there's nothing to keep you from buying individual stocks and bonds, there's no tax penalty for that, but the reporting would get complicated.

Finally the situation with UK pensions is quite complex too. It's good to have one, but you should definitely get your taxes done professionally as a Tax Treaty position has to be taken to exclude contributions from US tax or you have to pay US tax on the contributions up front.

OP, you can:

Take the blue pill: Blow the lot on Cuban cigars, French wines, Russian caviar, Persian carpets, Abyssinian dancing girls etc. The IRS gets nothing. Speak to no tax advisors and do not hang out on forums like this.

Take the red pill: Invest the money. You are now a tax cheat hiding money in offshore accounts (until proved innocent). Learn the intricacies of tax forms that put Kafka to shame. Make no errors or you will lose a large portion of your worldly assets. Every year, a hand will reach out across the Atlantic into your pocket to take a portion of your meagre gains (should you be so lucky).

Your choice.

OP, you can:

Take the blue pill: Blow the lot on Cuban cigars, French wines, Russian caviar, Persian carpets, Abyssinian dancing girls etc. The IRS gets nothing. Speak to no tax advisors and do not hang out on forums like this.

Take the red pill: Invest the money. You are now a tax cheat hiding money in offshore accounts (until proved innocent). Learn the intricacies of tax forms that put Kafka to shame. Make no errors or you will lose a large portion of your worldly assets. Every year, a hand will reach out across the Atlantic into your pocket to take a portion of your meagre gains (should you be so lucky).

Your choice.

 

"And so endeth the lesson."

Well that's confusion into disillusionment in 4 easy posts.

So essentially my choice is cash for easy paperwork but small gains (esp when inflation is taken into account) or individual stocks (no funds?) for better gains but hours of paperwork?

So much for trying to encourage young people to save...the caviar and dancing girls are starting to sound like the smart option.

Or, you can make any investment you like where you think the gains will far exceed those from a cash ISA, and hire a professional tax adviser to sort it all out for you. You then weigh the amount of gains against the fee.

So much for trying to encourage anyone to save.

Yeah, I guess I have to bite the tax adviser bullet. And then write angry letters to congress.

Thanks for the help everyone!

It's pretty frustrating for a US citizen when it comes to investing abroad. For the UK citizen in America there aren't any issues as the UK doesn't tax it's non-residents. The problem arises for US citizens as the US taxes on citizenship, not residency. Another fine example of American exceptionalism.

I'd advise you to look into investing in the US particularly in a ROTH IRA. If you take foreign tax credits on your 1040 rather than using the FEIE you will have earned income, and if your UK tax bill is larger than the US one, no tax payable to the IRS. Now that you have earned income on the 1040 you can put money into a ROTH and gains and distributions are free of both UK and US tax.

Also there may well be no US tax to pay on the interest from a cash ISA and 4% is pretty good today. I'd build a cash ISA "ladder" so that you have one year, two year up to five year accounts. As the they mature you transfer them to another  high interest five year cash ISA. So after 5 years you'll have 5, 5 year cash ISAs and each year one will mature and you have penalty free access to the money.

I'd advise you to look into investing in the US particularly in a ROTH IRA. If you take foreign tax credits on your 1040 rather than using the FEIE you will have earned income, and if your UK tax bill is larger than the US one, no tax payable to the IRS. Now that you have earned income on the 1040 you can put money into a ROTH and gains and distributions are free of both UK and US tax.

+1

I'd build a cash ISA "ladder" so that you have one year, two year up to five year accounts. As the they mature you transfer them to another  high interest five year cash ISA. So after 5 years you'll have 5, 5 year cash ISAs and each year one will mature and you have penalty free access to the money.

For someone just starting, it sounds very boring. But the 'ladder' is a very effective method, and generally risk free, so good to balance a portfolio. The gains seem small in the beginning, but after several years they grow in significance. I've been contributing max amounts to ISAs since they started. The amount of UK tax free income generated is sufficient to start reducing noticeable amounts of my 1116 UK credits.

For someone just starting, it sounds very boring. But the 'ladder' is a very effective method, and generally risk free, so good to balance a portfolio. The gains seem small in the beginning, but after several years they grow in significance. I've been contributing max amounts to ISAs since they started. The amount of UK tax free income generated is sufficient to start reducing noticeable amounts of my 1116 UK credits.

I just read the ISA rules and I don't like that they only let you put half of the ISA max contribution in a cash ISA, the CITY probably wants the higher fees on the stocks and shares ISAs.

So OAP do you just do the cash ISA?

FYI if you put 5340 pounds each year into a cash ISA yielding 4% after 20 years you'd have 165,375 pounds. Of course at 3% inflation that's not a great return, but people often forget the savings part of investing....sure you only get 1% real return, but putting something aside each year even if it doesn't grow that quickly is worthwhile, and think of the tax benefits, they are huge.

The amount they let you put is constantly increasing as well. When I first opened my ISA the max amount was only about £3000. Not that I've ever made enough money to get even close to the max

So OAP do you just do the cash ISA?

Yes. I have a cardinal rule about my tax situation: Keep it simple.

As Buffet (or somebody) says: "the miracle of compounding interest". Boring, slow, no fantastic gains in one year only to be wiped out the next. Eventually though, it really adds up if you just leave it alone.

There have been times when you could earn more interest with a regular account after paying the tax, than the tax free gains you would get on an ISA. But, once the funds are in a tax free account, they remain tax free even if you change ISA providers.   

Not that I've ever made enough money to get even close to the max

DSL, I have full confidence that someday you'll earn far more than enough to reach the max. Just give it time.

+1

For someone just starting, it sounds very boring. But the 'ladder' is a very effective method, and generally risk free, so good to balance a portfolio. The gains seem small in the beginning, but after several years they grow in significance. I've been contributing max amounts to ISAs since they started. The amount of UK tax free income generated is sufficient to start reducing noticeable amounts of my 1116 UK credits.

But of course the ISA interest sits in the Passive basket Form 1116 which is only rarely where individuals have any excess foreign tax credits.  So the return that is received is typically free of UK tax but subject to US tax.