US ETF , UK brokerage, UK resident, US citizen

I would like to buy a US ETF, say Vanguards S&P 500 index fund (VOO) which would save me from the PFIC reporting nightmare to the IRS and is labelled as a reporting fund by the HMRC for easy UK tax compliance. Thus avoiding the catch 22 situation of mountains of paper work.

I am UK resident, US citizen and my UK brokerage account with Halifax requires me to hand over a W-9 form with my SSN and address if I wish to enter the US market. This form is a W-8 if you are not a US citizen. I understand this form is so the IRS do not withhold taxes on any of my US investments. Is this correct? Next what is the situation with reporting foreign capital gains and dividends to the HMRC ? I read some places that it can be 15-30% tax on dividends, then there is £300 dividend limit for HMRC self assessment, and as regards capital gains tax I'm clueless and hoping it's 0 for my situation.  I think I'm comfortable with the US reporting side of this as it's all US source income.

Basically I'm trying to escape as much paper work as possible by not going over any limits and it would help if someone could clarify. Thank you.

I would like to buy a US ETF, say Vanguards S&P 500 index fund (VOO) which would save me from the PFIC reporting nightmare to the IRS and is labelled as a reporting fund by the HMRC for easy UK tax compliance. Thus avoiding the catch 22 situation of mountains of paper work.

Well done, this is a good way for US citizens resident in the UK to invest their money

I am UK resident, US citizen and my UK brokerage account with Halifax requires me to hand over a W-9 form with my SSN and address if I wish to enter the US market. This form is a W-8 if you are not a US citizen. I understand this form is so the IRS do not withhold taxes on any of my US investments.

The IRS are not responsible for tax withholding, your brokerage has to do that. I'm surprised that your UK Halifax brokerage will do business with you as a US citizen because of the US compliance issues.

Is this correct? Next what is the situation with reporting foreign capital gains and dividends to the HMRC ? I read some places that it can be 15-30% tax on dividends, then there is £300 dividend limit for HMRC self assessment, and as regards capital gains tax I'm clueless and hoping it's 0 for my situation.  I think I'm comfortable with the US reporting side of this as it's all US source income.

Basically I'm trying to escape as much paper work as possible by not going over any limits and it would help if someone could clarify. Thank you.

As you are holding US ETFs and are a US citizen resident in the UK you will have to look to the tax treaty for guidance. The US requires that you pay them 15% on dividends and you can use that as a foreign tax credit against the UK dividend tax. For capital gains you pay the UK first and will then have to resource the gains on form 1116 so that you can take a foreign tax credit for the UK tax on your US 1040.

If you can keep your income low so that you end up paying 0% capital gains and dividend taxes in the US and the UK your life will be a lot easier.

Thanks nun. I too am surprised that any UK brokerage will do business with US citizens these days but I opened the brokerage account a while ago now. I'm quite sure I had to tell them I was a US citizen and UK resident on opening.  They even called me and questioned me about it. However I think it would be discriminating not to allow UK residents financial services based on nationality, and I would complain to the financial ombudsman if I was denied my financial rights in this country.

Of course it would be easier if I opened a US brokerage account but this is near to impossible at the moment. I left the US a long time ago and I haven't seen any US share dealing service that will not perform a credit check on opening an account for verification purposes and require a US address. I am in the process of establishing credit history and using a US address of my next of kin, but this will take a while to fully establish. Even then, I worry that the US brokerage service would require me to fill out some IRS forms where I will be forced to note my UK address and thereby kick me out cause I'm not US resident.

So this leaves me with my UK brokerage account. Is there any point in me giving them the W-9 form ? as they should know I'm a US citizen already. I think I will just bite the bullet, buy a US ETF and see what happens. If they do withhold too much I can surely claim a refund somehow or ?

 

Thanks nun. I too am surprised that any UK brokerage will do business with US citizens these days but I opened the brokerage account a while ago now. I'm quite sure I had to tell them I was a US citizen and UK resident on opening.  They even called me and questioned me about it. However I think it would be discriminating not to allow UK residents financial services based on nationality, and I would complain to the financial ombudsman if I was denied my financial rights in this country.

Of course it would be easier if I opened a US brokerage account but this is near to impossible at the moment. I left the US a long time ago and I haven't seen any US share dealing service that will not perform a credit check on opening an account for verification purposes and require a US address. I am in the process of establishing credit history and using a US address of my next of kin, but this will take a while to fully establish. Even then, I worry that the US brokerage service would require me to fill out some IRS forms where I will be forced to note my UK address and thereby kick me out cause I'm not US resident.

So this leaves me with my UK brokerage account. Is there any point in me giving them the W-9 form ? as they should know I'm a US citizen already. I think I will just bite the bullet, buy a US ETF and see what happens. If they do withhold too much I can surely claim a refund somehow or ?

You're in a bit of a strange situation being a US citizen in the UK with a UK brokerage account buying US ETFs. If you were an NRA you'd just file a W-8BEN and there would be no US issues tax at all, but as a US citizen you can't file a W-8BEN. I don't know how Halifax UK will deal with withholding, but you will have tax liabilities in the US because of your citizenship and in the UK because of your residence. You must understand that dividends and capital gains are taxed differently under the treaty. In fact it's probably easiest for you to look for a Vanguard ETF that doesn't (or at least rarely) distributes capital gains then you just have to deal with them when you sell.

You will be able to take credit for dividend and capital gains tax paid in one country in the other, you just have to get the order and amounts correct. There is an instructive example on page 104 of the technical explanation to the treaty.

http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

From the treaty it looks like the limit for withholding tax is 15% in all such situations. A US citizen residing in the UK should pay no more than 15% tax on US source dividends.

However if you don't file the required forms (W-8BEN as a NRA) it will be withheld at 30%. The US citizen can file W-9 but from what I read this will do nothing. Here is some text from a UK brokerage website (http://www.hl.co.uk/shares/buying-us-listed-shares):

Please note that we are unable to reduce the 30% withholding tax incurred for US persons submitting a W-9

and

US citizens or residents will not benefit from a reduced rate of tax.

So the US citizen is forced into paying 30% even though no more than 15% is required. How does the US citizen get the excess 15% back that was withheld? I have found no solution to this.

So the US citizen is forced into paying 30% even though no more than 15% is required. How does the US citizen get the excess 15% back that was withheld? I have found no solution to this.

As a US citizen the saving clause is applicable so the IRS will withhold and charge you tax according to their usual rules.

If you are liable to UK dividend tax you will pay that to HMRC. Then you resource the US ETF dividend to the UK on form 1116 so you can apply both the UK tax and the 30% withholding to your 1040. That should result in a tax refund.

I suggest contacting Charles Schwab in London. I am an American who opened an account with them after I moved to the UK -- so no problem with not having an American address. I have been very happy with the staff in the London office as well as Schwab in general. The website contains lots of research to help you decide what to buy. You can easily trade a wide range of ETFs or other investments through their website for only $8.95 a transaction.

If you provide the W-9, I believe that they will not withhold U.S. Tax at all. Instead, they will send you a 1099 and you will pay the 15% when you file your U.S. Tax return.

If you are liable to UK dividend tax you will pay that to HMRC. Then you resource the US ETF dividend to the UK on form 1116 so you can apply both the UK tax and the 30% withholding to your 1040. That should result in a tax refund.

Where do you apply the 30% withholding on the 1040 ? is this line 64 ? I don't expect a UK based business to provide me with a 1099 form, is a 1099 strictly required ? If not I can see how this would work.

If you provide the W-9, I believe that they will not withhold U.S. Tax at all. Instead, they will send you a 1099 and you will pay the 15% when you file your U.S. Tax return.

I would like to think so, but as in this situation it's a UK brokerage, I don't expect them to prepare any US tax forms like the 1099. I believe they just want the W-9 for their FATCA reporting obligations and leave the their US citizen customer to sort out his own tax affairs.

I suggest contacting Charles Schwab in London.

It does look like a better option... will look into it, thanks.

I suggest contacting Charles Schwab in London. I am an American who opened an account with them after I moved to the UK -- so no problem with not having an American address. I have been very happy with the staff in the London office as well as Schwab in general. The website contains lots of research to help you decide what to buy. You can easily trade a wide range of ETFs or other investments through their website for only $8.95 a transaction.

This sounds like an option, juts remember to stick to funds that are not PFICs and are HMRC reporting.....so basically Vanguard EFTs.

Where do you apply the 30% withholding on the 1040 ? is this line 64 ? I don't expect a UK based business to provide me with a 1099 form, is a 1099 strictly required ? If not I can see how this would work.

Yes you'd apply it there. However, I'm not sure Halifax UK would know anything about a 1099, but they might withhold 30% as a default.....why not ask them? I'm sure we'd all be interested in the answer.

If you go with a US based provider there will definitely be withholding as you are a US citizen resident overseas. But you can claim it all back by resourcing the income and taking a foreign tax credit.

I will send some emails to my UK brokerage and Schwab international. See what they have to say. 1099 or not, if a refund is due it should be taken. You can always back it up with receipts etc. in case of an audit I would assume.

TinaS do you get a 1099 from your Schwab international account at the end of the year ? and is it reportable on the FBAR?

robertUSA,

The Schwab account is similar to what someone residing in the States would have, including the use of SSN for reporting to IRS. Everything is held in USD. It's possible to buy foreign shares if they are traded on US-based exchanges (e.g. the ADR of a company like Novartis)

It is not necessary to include this account on FBAR because the funds are in the States and the IRS receives the 1099 information.

I get a 1099 "composite" -- including 1099-DIV (ordinary/qualified dividends, capital gains distributions, foreign taxes paid, federal income tax withheld, etc), 1099-INT (interest) and 1099-B (proceeds from Broker Transactions). The Broker Transactions are clearly identified for completing Form 8949 (i.e. whether or not basis was reported to IRS).

Because all transactions are online (individually and on monthly statements), it is easy to pull off interest and dividends for HMRC's April 6 - April 5 tax year.

robertUSA,

I went with Schwab because years ago I was in a similar situation to you -- where tax was withheld from a UK brokerage. If I remember correctly, I put this as a credit on the 1040 using the term "Backup Withholding" Unfortunately, I cannot recall the line number, but the following link should help:

Topic 307 Backup Withholding
http://www.irs.gov/taxtopics/tc307.html

The above page makes reference to Publication 1281. Happy reading!

I still use a UK-brokerage for UK-based shares, but only invest on the American markets through Schwab.

I suggest contacting Charles Schwab in London. I am an American who opened an account with them after I moved to the UK -- so no problem with not having an American address. I have been very happy with the staff in the London office as well as Schwab in general. The website contains lots of research to help you decide what to buy. You can easily trade a wide range of ETFs or other investments through their website for only $8.95 a transaction.

Be careful to limit your investments to either individual stocks and bonds or mutual funds/ETFs that are both HMRC reporting funds and and also NOT PFICs.