Divesting and reinvesting each year to simplify PFIC?

Greetings, everyone!

I recently posted a question regarding sorting out my error in investing in a stocks and shares ISA.  Users nun and goya provided helpful replies, and gave me direction into further research.  While I'll have to fill out PFICs for each and every fund in the ISA, this seems to be relatively simple because I will have bought and sold the funds within the same US financial year.  This causes me to wonder – what would the consequences be should I invest in UK funds at the beginning of each financial year, and divest myself by the end?  Could I make a decent return, and while not avoiding filing PFICs altogether, keep them simple and (more importantly) stay clear of accruing interest on them.

It seems as if the market at this point is in a period of growth, but that a USC in the UK has a hard-time avoiding punitive charges by one of both governments.  Most of my money is UK based, and while I could move it to the US for investment, this brings up two problems.  The first is that it's a little more difficult to liquidate, and the second is opening a US brokerage account.  The first isn't crucial, and I can manage the second via using a relative's address in the states, but I'm not certain that I want to go down that route.

I also know that I can avoid PFICs altogether by investing directly in various stocks, but I'm worried that my abilities in this regard are not as good as fund managers.  I think that I could do okay, but believe I could get a better return with less stress from funds.

I know that I could also invest in US-domiciled ETFs.  I believe that should I invest in those noted by the HMRC as having UK reporting status (and a CUSIP number), that I can avoid PFICs for those accounts (though I may be mistaken).  I know that such funds offered by Vanguard can be had through Hargreaves Lansdown, but their charges are pretty high.

This leaves me with my initial scenario.  I was wondering what the consequences would be were I to invest in funds in the beginning of January and divest in early to mid-December.  I would have to fill out PFICs, but I would not carry over penalties or interest for previous years.  I know that any gains would be taxed as regular income instead of as capital gains/loses, but running these numbers against other situations (savings, cash ISA) make it intriguing.  Is there anything wrong or illegal about taking this course of action?

I'm not trying to dodge tax or pull the wool over anyone’s eyes; I'm just trying to find a way forward in making a decent (if small) investment.  One concern that comes immediately to mind is that such yearly buyings and sellings might raise a red-flag with the IRS and while not illegal, may cause an investigation that would be a big hassle.

If anyone has any thoughts about any or all of this, I'd be interested to hear them.

Many thanks!

I would not want to be forced into selling at a particular time and the tax on PFICs would still be an issue.

If you can open a US based account I'd simply get a Vanguard account and buy Vanguard ETFs. You will have far lower costs than with a UK brokerage and avoid all PFIC and HMRC reporting issues.

You might want to look at the London office of Charles Schwab:

http://www.schwab.co.uk

This would generate all the right paperwork for both sets of taxes.

I would not want to be forced into selling at a particular time and the tax on PFICs would still be an issue.

If you can open a US based account I'd simply get a Vanguard account and buy Vanguard ETFs. You will have far lower costs than with a UK brokerage and avoid all PFIC and HMRC reporting issues.

Good solid advice. I'd just add that you can open the Vanguard account using a US address of a relative, then immediately change your address on file to the UK once the account is set up, and from personal experience Vanguard will be perfectly happy to continue working with you.

Also, it's a great time to be moving sterling into dollars as the exchange rate is very favorable now.

You could alternatively obtain a similar result (but without the transaction costs) by making M2M elections for each fund or investing in PFICs that provide the investor with the data to make QEF elections.

The latter route is proving commercially successful for some Canadian mutual fund families; so it might be something that UK investment houses might be willing to do for you if you asked them.

You could alternatively obtain a similar result (but without the transaction costs) by making M2M elections for each fund or investing in PFICs that provide the investor with the data to make QEF elections.

The latter route is proving commercially successful for some Canadian mutual fund families; so it might be something that UK investment houses might be willing to do for you if you asked them.

US Vanguard has the advantage of very low costs. There will be some expense in transferring money from the UK to the US, but if you only do it a couple of times a year that should not be too much of an issue. Frankly the chance of using US Vanguard over a UK brokerage/funds supermarket is worth the little bit of trouble transferring money because the UK firms fee structures are a rip off....even with the recent reforms. Also with US vanguard all the documentation is done for you. Each year you'll get a simple statement of all your dividends and capital gains. If you have earned income you can also invest in a ROTH IRA which will compensate a bit for the issues with ISAs.

There are certainly other ways to organize things as Guya points out and companies that specialize in US expat investing. But those might get complicated and involve significant fees. For the regular US expat with a few dollars to invest a UK based savings bond ladder, a ROTH and a Vanguard ETF portfolio is a nice solution from both US and UK tax compliance and sensible investing practice perspectives. I would not do M2M because you'll pay income tax rates; QEF is better, but you have to search out funds that will provide you with the required paperwork and then go through the PFIC forms. Frankly, if you can buy Vanguard ETFs why would you bother?

Here is something about the Canadian firms that are providing documentation for PFIC returns.
http://isaacbrocksociety.ca/2014/02/21/fidelity-joins-mackenzie-to-make-ownership-of-pfic-mutual-funds-more-tolerable-for-canadians/