USC in UK - Investment options

Hi everyone,

I'm new to the board and have learned quite a bit by reading through the many posts on this topic. Though I still am struggling to find the most sensible approach to invest my savings from UK earnings despite my fairly typical circumstances.

Both my wife and I are USCs, living in the UK since 2013.
Both of us are employed by UK employers, with wages as 100% of our income.
I file a HMRC SA as I am above income threshold.
Wife and I file jointly to IRS.
We are saving to buy a home in 3-4 years time in the UK and want to invest excess UK savings toward a down payment.
We plan to stay here for 5-10+ years, but don't want to relinquish US citizenship.

From what I have read, which is also what my tax advisor recommends, is to avoid getting entangled in PFICs, and ideally invest via US based brokerage co in HMRC reporting funds. Or do a Cash ISA, though the IRS will tax interest (what little of it a depositor receives these days...).

However, this strategy leaves one exposed to the vagaries of the GBP:USD exchange rate, as there do not appear to be GBP sterling hedged, HMRC reporting funds available. This is not insignificant, and so I'm hoping to develop a tax planning strategy that can mitigate that.

So I'm left with a few questions:

1. With the approach some take with the US broker/HMRC reporting funds... do you protect yourself from the GBP:USD FX movements or is that not possible? I am open to taking advice from a qualified financial advisor but end savings goal is around 100k gbp so can't afford services geared toward HNW individuals.
2. If I were to go down this path, and in 4 years time, liquidated all my USD holdings from the US broker, and transferred them to the UK and into GBP, what would be the tax liability that would crystallise at that time? My understanding is that I would have been taxed on interest/dividend income during the life of the investment in the US, and then declared a foreign tax credit to HMRC to avoid double taxation each year. Cap gains would be realised only on sale, and incurred in US, with declaration to HMRC in the year the gains were realised. Net result would be that I would bear the tax liability at prevailing US rates for investment income/capital gains. Is this correct?
3. For foreign tax credits earned from the IRS... can these be offset against capital gains or only income?
4. My tax advisor mentioned there is a min threshold, of maybe 25k GBP, under which the IRS will not require PFIC reporting. I have a robo advisor stocks and shares ISA that was up to 12k prior to withdrawls bringing it down to 5k. Am I missing something? Otherwise I would have thought this would be a component of a tax-efficient investment portfolio for USCs in the UK.

Thanks in advance for any thoughts any of you might have.

Hi everyone,

I'm new to the board and have learned quite a bit by reading through the many posts on this topic. Though I still am struggling to find the most sensible approach to invest my savings from UK earnings despite my fairly typical circumstances.

Both my wife and I are USCs, living in the UK since 2013.
Both of us are employed by UK employers, with wages as 100% of our income.
I file a HMRC SA as I am above income threshold.
Wife and I file jointly to IRS.
We are saving to buy a home in 3-4 years time in the UK and want to invest excess UK savings toward a down payment.
We plan to stay here for 5-10+ years, but don't want to relinquish US citizenship.

From what I have read, which is also what my tax advisor recommends, is to avoid getting entangled in PFICs, and ideally invest via US based brokerage co in HMRC reporting funds. Or do a Cash ISA, though the IRS will tax interest (what little of it a depositor receives these days...).

However, this strategy leaves one exposed to the vagaries of the GBP:USD exchange rate, as there do not appear to be GBP sterling hedged, HMRC reporting funds available. This is not insignificant, and so I'm hoping to develop a tax planning strategy that can mitigate that.

So I'm left with a few questions:

1. With the approach some take with the US broker/HMRC reporting funds... do you protect yourself from the GBP:USD FX movements or is that not possible? I am open to taking advice from a qualified financial advisor but end savings goal is around 100k gbp so can't afford services geared toward HNW individuals.
2. If I were to go down this path, and in 4 years time, liquidated all my USD holdings from the US broker, and transferred them to the UK and into GBP, what would be the tax liability that would crystallise at that time? My understanding is that I would have been taxed on interest/dividend income during the life of the investment in the US, and then declared a foreign tax credit to HMRC to avoid double taxation each year. Cap gains would be realised only on sale, and incurred in US, with declaration to HMRC in the year the gains were realised. Net result would be that I would bear the tax liability at prevailing US rates for investment income/capital gains. Is this correct?
3. For foreign tax credits earned from the IRS... can these be offset against capital gains or only income?
4. My tax advisor mentioned there is a min threshold, of maybe 25k GBP, under which the IRS will not require PFIC reporting. I have a robo advisor stocks and shares ISA that was up to 12k prior to withdrawls bringing it down to 5k. Am I missing something? Otherwise I would have thought this would be a component of a tax-efficient investment portfolio for USCs in the UK.

Thanks in advance for any thoughts any of you might have.

Welcome to the site. 

I can only tell you what we do, as a married couple, both USCs living in England, but I am NOT a tax or financial advisor.

1. Our UK savings are limited to individual income bonds and interest bearing savings accounts and avoid stocks shares funds, even those in ISAs. We invest in a US ETF reporting fund outside of IRAs and just live with the exchange rates. For example, our fund just paid out a quarterly dividend which when we do our UK SA will be reported in £s on the exchange rate on the day the dividend was paid - not when we transfer it the UK. Same goes for when we sell shares from the fund, the selling price is converted to £s on the day of the sale and the purchase price from the day we bought them. XE.com holds historical exchange rates. Foreign tax credits are used to lower the US taxes.

2. See my answer for above.

3. Foreign tax credits are like for like so taxes on passive income loan only be used to offset those taxes paid on that passive income and not on earned income.

4. I don’t know the answer to this as we have no PFICs at all

My opinion....if you are saving money to buy a house in the UK in 3-4 years....I'd just stick the money in savings or maybe a short term bond. Neither will get you much interest, but if you need the money to be there in just a few years I wouldn't take risk with it.

Saving money to put into investments that you will want in 10+ years....I'd give a different answer. And even that would depend on whether you will need that money here in the UK, or in the US at some point in the future.

After the trouble I've had just figuring out my taxes....take anything I say with a huge grain of salt

My opinion....if you are saving money to buy a house in the UK in 3-4 years....I'd just stick the money in savings or maybe a short term bond. Neither will get you much interest, but if you need the money to be there in just a few years I wouldn't take risk with it.

Saving money to put into investments that you will want in 10+ years....I'd give a different answer. And even that would depend on whether you will need that money here in the UK, or in the US at some point in the future.

After the trouble I've had just figuring out my taxes....take anything I say with a huge grain of salt

I agree with this. Investing in the short term (<5 years) is a big risk in the stock market, then add in exchange change risk and it is an even bigger risk.

I’d invest in premium bonds for a short term investment.

I’d invest in premium bonds for a short term investment.

We do this and have done alright compared to savings accounts.  I track the prizes on a spreadsheet and calculate the equivalent interest rate using the IRR function. We use the app on our phones to check prizes each month. £500 is the largest prize we have had so far.

2018 - 1.1%
2019 - 2.26%
2020 - 1.29%

If you're looking to buy your first house (certainly here in the UK) you should look at a Help to Buy ISA or a LISA (Lifetime ISA). - if you're under age 39!

Not sure what the US tax implications are but the UK government adding a 25% bonus will surely help to offset any tax due to the IRS on the bonus.

Here's a good resource:

https://www.moneysavingexpert.com/savings/lifetime-isas/

A good resource also for other money saving tips.

For question 4, my understanding was that when the PFIC was sold, gains were taxed as ordinary income which is prohibitive compared to normal CGT rates. You also have to fill in the awkward 8621 for every fund, which if it’s a robo portfolio, could be many. You are correct in saying there is no reporting requirement for the PFIC’s mere existence if not sold. I’d check with an expert on that because I’m definitely an amateur.

I’d echo the others in saying you are better off in cash for such a short time. Charles Schwab also offers a US dollar account from the UK if you have 25k to invest. I believe it only allows purchase of shares/bonds not funds or similar.