Dual Citizen- Can I invest in ISA?

Hoping this forum can help. I've been living in the UK for 8 years and am now a dual citizen of both the US and UK. I am trying to figure out how to best invest. I have two US mutual funds, a 529 for my son's education fund in NY and a pension with my UK employer. My husband and I are looking to buy a house in the UK. I would also like to diversify further and potentially get a stocks and shares ISA. I am aware of the Fatca laws. But the issue is diversification and currency issues-- converting GBP to USDs isn't efficient. I assume forum readers are in similar situations. What investments do you advise?  I plan on residing in the UK indefinitely and would not want to renounce citizenship. Is there a financial advice provider who is reasonable (couple hundred pounds) to help (We by no means super rich)?

My wife and I are dual UK/US citizens and plan on moving to the UK in May.

Investing in ISA's should be no problem as long as they are cash ISA's because investments in stocks and shares ISA's are treated as Passive Foreign Income Companies and are taxed quite severely by the IRS.  The income from cash ISA's is taxed each year like regular interest income by the IRS, it is not tax free as it is the UK.

I have converted our Mutual Funds in the US to ETF's that are "HMRC Reporting Funds" as I believe they are treated by HMRC the same as UK funds, and not considered as PFIC's for tax purposes.

Hello and welcome to the forum.

> I am trying to figure out how to best invest.
Best, I presume, means because you're in the tax forum, least tax? It could mean most efficient, which is a 'return at the world markets benchmark': it could mean least financial service charges.

Usually US clients in the UK avoid taking out an ISA. But if your UK tax credits more than offset your US tax on the same income (unlikely for those claiming the earnings exclusion), there is a case made to use it.

I continue to not understand why people use ETFs since there annual cost is double, roughly, the cost of investing directly. Say, 0.7% p.a. compared to 0.3%: and there are no PFIC complications. Better though, than retail funds at 3% p.a.

> But the issue is diversification and currency issues-- converting GBP to USDs isn't efficient.
Yes it's a problem when you get an ISA administrator who insists the money arrives in sterling, even if you then go and buy a USD denominated share: and especially if the whole account is to report in USD. The answer I think is to convince the ISA admin. team that they don't need to convert. Always assuming you are using a self select ISA.

> I assume forum readers are in similar situations. What investments do you advise?
The numbers we have done suggest that continuing a 401(k) left in the USA is 'best' i.e. more tax efficient, for those taking the eventual income in the UK. Some suggest a Roth IRA but due to the difficulty of establishing enough money in the account to obtain diversity and cost-effective direct dealing, I am not yet convinced.  Your other main choice is to use a SIP, rather than an ISA.

>  I plan on residing in the UK indefinitely and would not want to renounce citizenship. Is there a financial advice provider who is reasonable (couple hundred pounds) to help (We by no means super rich)?

My personal view is that financial advice of the kind you are asking for, quite reasonably, has been all but eliminated from the UK: I base this on observing what UK planners and IFAs say privately and the service/products they offer. Then your requirement for UK-US advice is a quantum step beyond even that faint hope. And as for cost, 2500 is probably the minimum cost to comply with current regulations - and I do mean before any (UK-only) advice.

I think the answer for you is to continue down the track that you are already on, which is to self-direct. May I ask if there was a book on tax, investment, useful brokers and private banks accounts and estate individual planning issues for UK US, what other topics would you want to see included?

I am trying to figure out how to best invest. I have two US mutual funds, a 529 for my son's education fund in NY and a pension with my UK employer.

You need to be careful that any non-UK funds you own are "HMRC reporting" unless you ar a non-dom, but your intention to stay in the UK indefinitely goes against that. The vast majority of US mutual funds are not and any dividends and capital gains will be taxed by HMRC at your marginal income tax rate. The same goes for the 529 plan and it does not enjoy tax free status in the UK, so reporting and paying tax on the annual gains will have to be done. Your UK employer pension should not be a tax issue because of the protection of the tax treaty.

I would also like to diversify further and potentially get a stocks and shares ISA. I am aware of the Fatca laws. But the issue is diversification and currency issues-- converting GBP to USDs isn't efficient. I assume forum readers are in similar situations. What investments do you advise?

DON'T buy a stocks and shares ISA as you will have to comply with PFIC filing in the US.
There's no US tax issues with a cash ISA, but you will be taxed in the US on any interest so for most US tax payers they have no benefit.

There are no negative tax consequences from investing in individual stocks, but diversification and paperwork can be difficult for small investors. Buying a house is probably a good investment over the long term....although the UK seems to be in a housing bubble right now. Your UK pension is a good place to invest in mutual funds as the tax treaty protects it from tax issues. I'd probably start with some savings bonds (ie UK equivalent of CDs) and then if you want to buy mutual funds outside of a pension wrapper they must not be PFIC and must be UK reporting, that basically limits you to US Vanguard ETFs. These can be purchased directly from US Vanguard, through a US broker, or maybe through a UK broker, but you must make sure its the US ETF and traded in the US.

I plan on residing in the UK indefinitely and would not want to renounce citizenship. Is there a financial advice provider who is reasonable (couple hundred pounds) to help (We by no means super rich)?

There are some professionals that post here, but the difficulty is to find someone that will give you holistic advice at what you might consider a reasonable cost.

I continue to not understand why people use ETFs since there annual cost is double, roughly, the cost of investing directly. Say, 0.7% p.a. compared to 0.3%: and there are no PFIC complications. Better though, than retail funds at 3% p.a.

Creating a diversified portfolio of individual stocks is hard for the small investor. But if US vanguard ETFs can be used then diversification is possible at a very low cost. With Vanguard USA I pay annual charges below 0.1% and pay nothing for fund trades. The difficulty is that you cannot open a US Vanguard account without a US residence.

Hi nun,

I absolutely take your point about diversification for the small investor: yet the maths shows that you diversify 75% of specific risk out with just eight holdings (from different sectors), so it is within one's grasp at, say, 150k?

Yes, 0.1% asset managament fee you are of course right again. For some reason everyone ignores the transaction costs, possibly because the FCA illustration rules do not permit them to be mentioned. But they're in the accounts, if you want to look. They vary - 0.5% to 1.5% p.a. I've seen.

There's no US tax issues with a cash ISA, but you will be taxed in the US on any interest so for most US tax payers they have no benefit.

A measured comment, but it may nonetheless be a tad too strong. There may well be a group for which a cash ISA is a good first step on the investing ladder, and the negative US treatment will pose no problem thanks to the standard deduction and personal exemption.

Not everyone is suited to the types of investing that have been discussed so far, and those individuals should not be discouraged from the basics of saving for the future. Although contrary to all investment advice, saving money in a "savings account" has merits for many.

I appreciate the extensive research you've done and the depth knowledge of investing shared between you and robnw, (and I really do mean that!), but let's not make those who may chose a different approach feel like losers from the start. There are some here who have never invested in the varied types being discussed, and they are doing OK, thank you very much.
 

   

I appreciate the extensive research you've done and the depth knowledge of investing shared between you and robnw, (and I really do mean that!), but let's not make those who may chose a different approach feel like losers from the start. There are some here who have never invested in the varied types being discussed, and they are doing OK, thank you very much.

 

Sorry if that's how my comment came across, it wasn't my intent.

A simple savings bond is the place I'd probably start and that should be in a cash ISA if the tax payer's US taxable income ends up being below the US deductions and exemptions....that's an excellent point you make. A UK pension is probably the first place to invest in UK funds for those liable to US tax. Unfortunately the funds offered are often expensive and people can make some rash decisions if they don't take some time to learn some investing basics.

Right now I think the OP should look at the UK tax issues involved with the US mutual funds and 529 plan and get those sorted.

Yes, 0.1% asset managament fee you are of course right again. For some reason everyone ignores the transaction costs, possibly because the FCA illustration rules do not permit them to be mentioned. But they're in the accounts, if you want to look. They vary - 0.5% to 1.5% p.a. I've seen.

Yes there will be transaction costs with a UK broker, but as I have an account directly with US Vanguard there is no charge for buying and selling Vanguard ETFs or mutual funds. I pay 0.0% in transaction fees and most of my funds have management fees under 0.1% as they are index trackers. The trick is to get an account directly with US Vanguard while you have a US address.

Yes there will be transaction costs with a UK broker, but as I have an account directly with US Vanguard there is no charge for buying and selling Vanguard ETFs or mutual funds. I pay 0.0% in transaction fees and most of my funds have management fees under 0.1% as they are index trackers. The trick is to get an account directly with US Vanguard while you have a US address.

+1

While in the UK I plan on managing our US Vanguard accounts from there. The 3 ETF funds we hold have fees of 0.1% or 0.05%.

Sorry if that's how my comment came across, it wasn't my intent.

No need to apologise. You've helped many on various sites, but not everyone is in the position to heed your valuable insights.

Those recently arrived in the UK, those about to arrive, or those with close ties to the US (with a desire to return) could profit from the advice you, robnw, and durhamlad have given, but may I pose a question from those in different circumstances.

There are some of us who have severed all ties to the US, don't have an address in the US, don't want to acquire a UPS/other post box address, and don't have a friend or relative whose address in the US we would care to use. Or, think of the 'Accidental American'. It seems Vanguard requires a US address in order for a USC to establish an account. We don't have any US pensions (401(?), Roth, 529, or similar).

Are we correct in thinking our only way of investing as described in previous comments is to go down the road of buying individual (UK? for UK tax purposes) stocks or shares or whatever they're called in the UK, and for US tax purposes use Schedule D(?) or whatever is the proper form now? Assuming we want nothing to do with PFICs, is this the only route open to us outside of cash ISAs and the variations of savings accounts (bonds, etc.)? The consensus of the previous comments seem to indicate that "dealing" in the UK can be rather expensive and thereby not the opportunity that is found in the US. OK, there's property, art, antiques and so on (but also US Cap Gains), but what if we only are interested in acquiring a sum of funds to fall back on, or to buy a house, etc.. Is acquiring a SIP in addition to existing UK pensions worth it? Any advice from any of you for those in such circumstances?

At a party over the holidays, I had a conversation with a solicitor. They were discussing ways for seniors to acquire funds to support the "elder care years". Their advice to clients was to invest in classic autos. Great in the UK and tax free, but the US wants Cap Gains on any profits. (The discussion started concerning one persons' 30's Bentley they bought for a pittance, sold, and discovered it's now worth £3M. Wouldn't the IRS love that.)

 

There are some of us who have severed all ties to the US, don't have an address in the US, don't want to acquire a UPS/other post box address, and don't have a friend or relative whose address in the US we would care to use. Or, think of the 'Accidental American'. It seems Vanguard requires a US address in order for a USC to establish an account. We don't have any US pensions (401(?), Roth, 529, or similar).

Are we correct in thinking our only way of investing as described in previous comments is to go down the road of buying individual (UK? for UK tax purposes) stocks or shares or whatever they're called in the UK, and for US tax purposes use Schedule D(?) or whatever is the proper form now? Assuming we want nothing to do with PFICs, is this the only route open to us outside of cash ISAs and the variations of savings accounts (bonds, etc.)? The consensus of the previous comments seem to indicate that "dealing" in the UK can be rather expensive and thereby not the opportunity that is found in the US. OK, there's property, art, antiques and so on (but also US Cap Gains), but what if we only are interested in acquiring a sum of funds to fall back on, or to buy a house, etc.. Is acquiring a SIP in addition to existing UK pensions worth it? Any advice from any of you for those in such circumstances?

After you've done the cash ISA/savings bond thing, a UK pension and a house then you might look into stock market investments that are not PFICs and are UK reporting. So those would be individual shares in companies and US based mutual funds or ETFs that are UK reporting. You can definitely buy the shares through a UK broker and Hargreaves and Lansdown sold some US Vanguard ETFs and you must be sure they are the US domiciled funds not the UK equivalents. I don't now the cost or practicality of buying US based ETFs through a UK broker.

After you've done the cash ISA/savings bond thing, a UK pension and a house then you might look into stock market investments that are not PFICs and are UK reporting. So those would be individual shares in companies and US based mutual funds or ETFs that are UK reporting. You can definitely buy the shares through a UK broker and Hargreaves and Lansdown sold some US Vanguard ETFs and you must be sure they are the US domiciled funds not the UK equivalents. I don't now the cost or practicality of buying US based ETFs through a UK broker.

Splendid, nun. Thank you for that.

There are often posts in this forum asking about investing. The responses are great for someone US-centric, but must lead to hands in the air confusion from the perspective of someone, although still a US expat, who is now UK-centric.

UK regulations are very tight when it comes to giving advice on investing, so we must always tread carefully.

It's my turn to apologise for what must seem as rambling incoherency on this subject, but may I offer a comment which may help all, including the OP rudmanr (and I apologise for somewhat high jacking the thread). I've read the reply from robnw several times and it's quite informative.

Delving in the markets is much, much more common in the US than in the UK for the average punter. I know very few acquaintances who went beyond buying a few shares when British Gas, British Telecom, etc. were privatised. We're also back in the situation where every individual has different circumstances. Regardless, that doesn't stop anyone from wanting to save a few bob here and there for a rainy day.

Could we offer degrees of investing suggestions according to US or UK-centric-ness [sp]?

First are those totally UK-centric (but with US citizenship) with no interests in the US or in US investments. It sounds as though we stop at "the cash ISA/savings bond thing, a UK pension and a house", along with individual UK reporting shares.

Then there are those looking beyond, and your post above seems to answer their needs. (Perhaps you could explain further about ETF's, although they appear not be Rob's favourite.) For those with US citizenship, I have a feeling brokers offering the type you are suggesting are few and far between unless the individual has a large amount of funds to invest.

And then, perhaps, suggestions for those more US-centric; those who already have investments or pensions in the US and wish to have a portfolio with US investments. This group will have benefited from the previous discussions upthread, and from previous threads.

rudmanr has what seems to be a specific situation, but it may benefit all, including rudmanr who wishes to remain in the UK indefinitely, by breaking down the options according to differing investing strategies due to differing desires as to where the money (investment) is to be located? Although, there's really nothing new in that. 

   

Delving in the markets is much, much more common in the US than in the UK for the average punter. I know very few acquaintances who went beyond buying a few shares when British Gas, British Telecom, etc. were privatised. We're also back in the situation where every individual has different circumstances. Regardless, that doesn't stop anyone from wanting to save a few bob here and there for a rainy day.

Anyone with a defined contribution plan where you put money in and buy funds (rather than a final salary pension plan) is delving into the markets. So the majority of people own some sort of stock/bond market investment. Unfortunately people often don't understand this and put money into funds blindly and then don't managed them well or understand when they are being ripped off through high fees or poor schemes.

First are those totally UK-centric (but with US citizenship) with no interests in the US or in US investments. It sounds as though we stop at "the cash ISA/savings bond thing, a UK pension and a house", along with individual UK reporting shares.

That's not a bad idea although I don't really like individual shares as they can be expensive to own and trade and don't give you much diversity.

Then there are those looking beyond, and your post above seems to answer their needs. (Perhaps you could explain further about ETF's, although they appear not be Rob's favourite.) For those with US citizenship, I have a feeling brokers offering the type you are suggesting are few and far between unless the individual has a large amount of funds to invest.

An ETF is just a "flavor" of investment fund very similar to a unit trust/mutual fund. Rob is pointing out that some sold in the UK can be quite expensive when all the fees are added up. This isn't a strike agains all ETFs, you just have to buy carefully to keep costs down. If a US centric person is interested in fund investing they should discuss buying US Vanguard ETFs with a UK broker. Start with the large fund platforms like BestInvest etc.

If the person has US pensions already they can be left in the US and income taken for retirement. People that plan ahead or still have a US residence address can open a US Vanguard account and buy the US vanguard ETFs directly.

Although I agree with the advice of most people here that it is not a good idea to invest in a stocks and shares ISA as a US citizen, it depends what exactly is meant by a "stocks and shares ISA"

If the ISA is used to invest in individual company shares which are traded at fair market value and managed solely by the US citizen, there is NO problem, other than the fact that you will still be liable for US tax on any gains. It will actually save you some paperwork by not having to file 1116s.

If the ISA is used for investing in pooled investments/mutual funds you have a PFIC problem.

I have asked several questions on this forum about this in the past.