Best practices for investing and dealing with taxes

I'm a US citizen with some investments (taxable and Roth IRA) in the US. I made those investments when I was living there. Now I have a job in the UK and should be here for another couple of years before I return to the US.

I don't really understand the implications of investing (and tax related) while I'm in the UK whether that be:
1) converting my pounds to dollars and just investing back in the US
2) investing my pounds in the UK into funds or ETFs that are really just backed by US companies.
3) doing something else.

Can someone please explain the "best practice" (if there is one) of what expats typically do and what I need to watch out for in terms of tax filing?  I do know that if I have more than 10k in a UK bank I need to file a form, but I don't know anything more than that.

I'm a US citizen with some investments (taxable and Roth IRA) in the US. I made those investments when I was living there. Now I have a job in the UK and should be here for another couple of years before I return to the US.

I don't really understand the implications of investing (and tax related) while I'm in the UK whether that be:
1) converting my pounds to dollars and just investing back in the US
2) investing my pounds in the UK into funds or ETFs that are really just backed by US companies.
3) doing something else.

Can someone please explain the "best practice" (if there is one) of what expats typically do and what I need to watch out for in terms of tax filing?  I do know that if I have more than 10k in a UK bank I need to file a form, but I don't know anything more than that.

I use Transferwise to transfer money to and from the US and UK.

There are no UK funds or ETFs that report into the US so all UK equity and bond funds are treated as Passive Foreign Investment Companies (PFICs)  and taxed punitively. However there are thousands of US ETFs that report into HMRC and receive favorable tax treatment for dividends and capital gains. Just Google “HMRC Reporting Funds”.

Having an aggregate sum of $10k in all foreign accounts requires a Foreign Bank Account Report (FBAR), is easy to do and is done online.

My wife and I are both USCs living in England and converted our mutual funds to HMRC reporting ETFs before we moved back and manage those ETFs plus others inside our IRAs online, transferring monies using Transferwise.

So if I understand correctly, if I have Vanguard mutual funds (which are not on the UK list) then I will receive a higher tax bill in the UK for having them?  And I should convert those to an approved ETF to avoid higher taxes in the UK?  I suppose that USCs are required to share investment info (investments outside the UK) somehow? I haven't done UK taxes yet (first year).

So if I understand correctly, if I have Vanguard mutual funds (which are not on the UK list) then I will receive a higher tax bill in the UK for having them?  And I should convert those to an approved ETF to avoid higher taxes in the UK?  I suppose that USCs are required to share investment info (investments outside the UK) somehow? I haven't done UK taxes yet (first year).

UK tax residents are taxed on their worldwide income. USCs are taxed on their worldwide income no matter where they live, so HMRC is the primary taxing authority and when you file taxes with the IRS you claim foreign tax credits against your US taxes which means you avoid double taxation.

With mutual funds HMRC doesn’t know what is inside of them so all distributions are taxed as regular income. If  funds report into HMRC then equity funds that pay dividends will  be taxed as stock dividends, which are at a much lower tax rate..

If you have foreign income such as from mutual funds and ETFs then you will be required to file a self assessment with HMRC. The following site gives a summary of the requirements

https://www.taxesforexpats.com/uk/us-tax-preparation-in-uk.html

Thank you. All of that makes sense.

So in my case I was a student most of the year but then started working in the UK in September 2020. I have some amount of dividends and capital gains in the US - not much so I don’t know if there is a bottom limit to filing.

Do I need to file a self assessment by Jan 31 2021?  (It’s rather confusing). I know money is taken out of my paycheck for uk income taxes. (Again I don’t make much)

Thank you. All of that makes sense.

So in my case I was a student most of the year but then started working in the UK in September 2020. I have some amount of dividends and capital gains in the US - not much so I don’t know if there is a bottom limit to filing.

Do I need to file a self assessment by Jan 31 2021?  (It’s rather confusing). I know money is taken out of my paycheck for uk income taxes. (Again I don’t make much)

Plenty of time to file.  The filing deadline for the 20/21 tax year for online self assessment filing is end of January 2022.  I always file before end of December rather than wait until end of January so that when I file my US return the following year I claim the UK taxes I actually paid in that calendar year as foreign tax credits rather than an estimate.

For the tax year 20/21 I don't expect you will have much UK tax to pay since you will only have 7 months pay and the tax free allowance is £12,500.  Also, if the dividends are from HMRC reporting funds the first £2,000 is tax free and the rest taxed at 7.5%.  The first £12,300 of capital gains is tax free then the rest probably taxed at 10%.

https://www.gov.uk/income-tax-rates
https://www.gov.uk/tax-on-dividends
https://www.gov.uk/capital-gains-tax/allowances
https://www.gov.uk/capital-gains-tax/rates

So in terms of filing taxes in the US for 2020, I do or do not use the amount I earned in the UK from Sept-Dec 31, 2020? 

So in terms of filing taxes in the US for 2020, I do or do not use the amount I earned in the UK from Sept-Dec 31, 2020?

You definitely should declare all worldwide income no matter where you live so yes, your UK pay from September should be included. You can claim a foreign tax  credit on your 2020 IRS return for HMRC taxes as “accrued taxes”.  Or if you have no other UK income you can simply exclude all your UK salary using IRS form 2555 (FEIE) which is what my son does every year. He is also a USC living and working in the UK.

To summarize, you shouldn’t need to pay US taxes on that UK income in 2020 but you must declare it otherwise you face possible fines.

You definitely should declare all worldwide income no matter where you live so yes, your UK pay from September should be included. You can claim a foreign tax  credit on your 2020 IRS return for HMRC taxes as “accrued taxes”.  Or if you have no other UK income you can simply exclude all your UK salary using IRS form 2555 (FEIE) which is what my son does every year. He is also a USC living and working in the UK.

To summarize, you shouldn’t need to pay US taxes on that UK income in 2020 but you must declare it otherwise you face possible fines.

Thank you so much for your help.  I think I get it now. I have to separate in my head US taxes and UK taxes.

So (since I have only worked in the UK during 2020):
- In early 2021, in the US, I will file my US taxes - which I've made something like 12,000 pounds in the UK from Sept-Dec, 2020. I suppose I'll just convert that to dollars using the pound to dollar rate on the date I was paid. Since I want to contribute to my Roth IRA (nice parents who help) in the US I will use FTC instead of FEIE so I can do that.  Right? Maybe this is silly the first year since I'll wind up paying taxes in the US in this case since I can't use any taxes I paid in the UK during 2020??
- Then in December 2021 I will file a self-assessment in the UK and pay my UK taxes (including worldwide income), then again in early 2022 file US taxes using my taxes paid in the UK as a credit (assuming I do the Roth IRA again).

Above all of this, I probably need to change my investments to "allowed" ETFs.

Sound right?

That sounds about right but I don’t understand the role of your parents and the Roth IRA. If your parents are giving you money to contribute to a Roth then there is nothing to report on your tax returns, US or UK, as taxes on gifts are the responsibility of the giver, not the recipient.  If your parents are in the USA they can each gift you $15k per year (total of $30k) with no paperwork at all. Gifts greater than that and they report the gift using form 109 to record it against their lifetime estate tax exemption of around $11m each.

That sounds about right but I don’t understand the role of your parents and the Roth IRA. If your parents are giving you money to contribute to a Roth then there is nothing to report on your tax returns, US or UK, as taxes on gifts are the responsibility of the giver, not the recipient.  If your parents are in the USA they can each gift you $15k per year (total of $30k) with no paperwork at all. Gifts greater than that and they report the gift using form 109 to record it against their lifetime estate tax exemption of around $11m each.

Sorry I wasn’t clear. They are just helping me fund it. I was just trying (poorly) to make the point that I think I need to use the FTC instead of the FEIE because I want to contribute to the ROTH IRA and you need earned income for that and the FEIE removes all earned income when used.

Sorry I wasn’t clear. They are just helping me fund it. I was just trying (poorly) to make the point that I think I need to use the FTC instead of the FEIE because I want to contribute to the ROTH IRA and you need earned income for that and the FEIE removes all earned income when used.

Gotcha. That makes sense.