US 529 College Plan & UK CTF

Hi, fellow expats-

I could not find a discussion of these topics on the forum. We are USCs and UK residents with a dual citizen child:

1)  There is a US 529 College Plan funded by US-based grandparents.  Do the parents (which one ?) or the child (beneficiary) report 529 income to HMRC ?

      Should the 529 plan only hold, say, Vanguard ETFs that are also HMRC Reporting Funds ?

2)  There is also a UK Child Trust Fund which is only funded by UK friends and US-based grandparents. Annual income, I assume, has to be reported either on our or our child's US 1040.

3)  Do any of these plans make sense given the constraints of the US and UK tax requirements ?
 
      Does it depend on the tax brackets of the participants ?


Thanking you in advance for your comments/advice.

I would be interested in replies as well to the OP #1 question.  We also have a 529 fund (ours does not contain Vanguard funds).  We will be moving to the UK for my husband's transfer next summer so interested as well on how to report.

I have no specific knowledge on this, but I imagine any 529 plans would not get any preferential tax treatment from HMRC if owned by a UK resident. If the plan is owned and funded by a US resident I don't see why it would need to be reported to HMRC. You would need to make sure the college that your child goes to qualified under 529 plan rules, and if it does the money could be used to pay college costs.

If a US citizen owns a UK Child Trust fund it would not get any special US tax treatment and any gains will be taxed by IRS and if you invest in PFICs you'd have to deal with the US tax issues on those too.

Thank you for your reply.

Regarding a 529 plan, Thun seems to indicate that it is problematic (p.3). I do not think residential status governs; the 529 account would be another offshore investment account to HMRC.

http://thunfinancial.com/american-expat-college-savings-529-plans/ [nofollow]

What do you think?

Thanks.

This response relates only to the Qualified Tuition Program, or 529 plan, part of taxi’s questions.

The legal basis of a QTP is not completely clear to me.  The best interpretation I can make is that it involves a gift to the relevant child, and that the fund is the property of the child, albeit with restrictions on access to it. It does not appear to involve a trust. Perhaps others would comment on this.

Some or all of the income from the fund is sheltered from US tax.  However, this tax exemption is not mirrored in the UK tax system where general principles apply.

The income which arises from the QTP is taxable on the child (and not the parents or grandparents).  The UK has a tax rule which provides that the income which arises to a child under 18 which derives from a parental gift is taxed on the parent.  Here the gift is from a grandparent and the child is also presumably over 18.

The child has a normal UK personal allowance, £10,000 for the current year, as this applies to all UK residents.

The double tax treaty does not affect the situation.  The treaty does not apply to US citizens other than some exceptions.  One of these exceptions is Article 20 (Students).  This article, which has various conditions, only exempts income for the maintenance education or training of a student.  This could, for example, exempt from UK tax a US scholarship.  However, it is difficult to see how it could exempt income from a QTP. Again, others may care to comment on this point.

Gains from sales of investments would also be taxable on the child (on the above interpretation of the legal basis of a QTP).  The capital gains tax annual exemption is currently £11,000.  If, however, gains arise from the sale of non-reporting mutual funds, they would be taxed in the UK as income under the offshore income gain rules.

The remittance basis is not likely to have any application to this situation.

If the income of the child (from all sources) is below the personal allowance and any gains (again from all sources) is below the annual exemption, then there is no obligation to report anything to HMRC or to complete a self-assessment.

Thank you Dunedin for your very informative help.

1) I do not think your reply would change because my child is under 10 years old.

2) The UK personal allowance is £10K from taxed savings and investments. My child has untaxed interest and dividends via a US UTMA (Bare Trust?), so the personal allowance becomes £2.5K. My child's income is currently well under this amount.

Thanks.

I am responding to taxi’s additional points of 5 August.

I agree that my original reply of 5 August is unchanged because taxi’s child is aged under 10.  The parental aggregation rule to which I referred does not affect income from funds gifted by grandparents.

My understanding is also that a US UTMA fund involves a base/bare trust for the child.  In UK tax terms, the income is therefore taxable on the child, and not the donor, subject to any application of the parental application rule.

The UK personal allowance can be set against all types of income, whether or not tax is deducted at source.  There are, however, special rules in relation to dividends.  UK dividends are deemed to carry a 10% tax credit, and are taxed at lower rates than other income.  These favourable provisions apply to most non UK dividends and distributions from mutual funds.  In current circumstances this will make no practical difference to the taxation of the child.

After some investigation...

1)  Since the US/UK Treaty does not recognize the US tax-advantaged status of 529 plans, my UK resident and USC beneficiary/grandchild will have to report 529 earnings to HMRC.
  a) Vanguard does not offer ETFs in any of its 529 plans; any sponsor's ETFs would have to qualify for HMRC Reporting Funds status.
  b) I  could only find one HMRC Reporting Fund that is in a US 529 plan; DFA's Global Equity in Utah's plan.
  c) DGEIX reports annually its current and prior years' ending FMV but does not disclose earnings or capital gains. Therefore, there would not be pertinent information for SA100 purposes.

2)  Given the practicalities, would a 529 plan make sense?

Thank you.