UK Taxation of HSAs

I'm a dual US/UK citizen planning to return to the UK in 2022 (after 18 years in the US). I have a US Health Savings Account (HSA) that is completely tax free in the US.

The non-authoritative answer (lots of google searching, very few hits) is that the UK doesn't recognize HSAs, and as such it will be treated as an unwrapped savings/brokerage account. i.e. tax on dividends, interest, and capital gains.

Does anyone have any experience (actual or anecdotal) of dealing with a HSA in the UK? I'm thinking tracking the dividends and interest payments will be a nightmare since the US HSA provider won't be producing tax summaries for HSA account since nothing is taxable in the US. Should I just avoid the hassle and cash the thing out (which would be very expensive as it would count as income and subject to early withdrawal penalties)?

My current plan is to keep the HSA, but to reset the cost basis by selling and repurchasing the shares while still in the US. This will also allows me to convert the mutual funds in the HSA over to HRMC reporting ETF funds. Actually, I'll probably put everything into a single ETF to simplify dividend / interest tracking, and depend on my other accounts to provide diversification.

I shot a couple of specific question on HSA taxation in the UK to HRMC, but I expect nothing back other than the usual link to the download location for the US/UK tax treaty. In about 2 months.

I actually closed my HSA, paid the 10% under 65 penalty prior to moving to the U.K. Although I had taken a hit on the distributed amount, the alternative of HMRC reporting was not something I wanted to do. I maxed out IRA contributions in that year and upped the 401(k) too. Ultimately it all worked out fine, effectively I didn’t see an additional tax burden. If you intend moving back to the U.S. convert HSA to simple interest to avoid otherwise complex reporting. You need way up your future of medical needs too, can you spend the balance and eliminate the 10% penalty. Will you work stateside again, how close are
you to Medicare… HSA balance and so on.

We don't know your income circumstances or plans when you return to the UK - but an alternative consideration is (as @Barcrest states) is to take the 10% hit but maybe look at investing it into a SIPP in the UK (assuming earnings will permit this) - get the tax relief out of it from HMRC.

I returned to the UK many decades ago, cashed in a 401k, paid the penalty (I think 10% or 20%) and rolled it into an employers' AVC receiving 40% tax relief out of the deal - ended up with more in the AVC than I had (gross) in the 401k. - sadly times have changed - that was when you could put up to £255k per annum in a pension (not that I ever had that much to invest!)

My current plan is to keep the HSA, but to reset the cost basis by selling and repurchasing the shares while still in the US. This will also allows me to convert the mutual funds in the HSA over to HRMC reporting ETF funds. Actually, I'll probably put everything into a single ETF to simplify dividend / interest tracking, and depend on my other accounts to provide diversification.

I think this is the best solution.  Before moving back to the UK I converted our taxable mutual funds to HMRC recognized ETF's. Some MFs had direct ETF equivalents so no tax hit but I did have one where i had to sell the shares, take the capital gain hit, and buy ETFs so that on return to the UK ongoing dividends and capital gains were recognized and treated as such.

First off, thanks all for your replies. I'm continually impressed by this forums willingness to engage and help.


@Barcrest
Simplification is always good, but the penalty for early withdrawal is now 20% (it used to 10%, they upped it), plus the withdrawal is classified as income and subject to income tax. I expect to have no earned income this year (I retired at the end of last year) so the income tax rate here would be very low, but because I'm already in the 23.8% band for capital gains this year, any increase in income is effectively pushing an equivalent amount of unrelated money into the 23.8% capital gains bracket. If I had less in the HSA account, I'd definitely trade the loss for the simplification. I need to keep reminding myself that I only have these problems because I have money, and therefore these problems are good problems to have :-)

@Smitch
I did the FIRE thing (https://en.wikipedia.org/wiki/FIRE_movement) almost by accident (I won't pretend I didn't get lucky - my tech job moved to the US, tripling my effective compensation almost overnight, while my living expenses, adjusted for inflation, remained around the same). I've retired early and my income is now entirely passive income (stock growth, dividends, and rental property). With no plans to get a job in the UK, I won't be eligible for a SIPP.

@durhamlad
Turns out I have to liquidate the shares anyway. When I finished work, I was automatically transferred to the HSA provider from hell (I won't name them). Apart from nickel and diming me to death, they aren't set up to support non-residents, and they don't offer any HRMC reporting funds. So I opened a HSA with Fidelity, tried to transfer the account, only for nickel and dime HSA to say they don't support stock transfers - only cash transfers and I need to liquidate everything first. Of course, finding that out took two hours on the phone to 4 different support people.

[Begin Rant]
The reason they don't support stock transfers? My insurer provided HSA is provided by a third party (the web site is insurer branded, with a smaller logo saying 'powered by ConnectYourCare'). But ConnectYourCare don't manage the stock themselves. No, they just do the websites and cash management. They outsource the investment side to a company called Devenir (who I've never heard of). But wait! Denevir only does the record keeping. They in turn outsource all the actual brokerage operations to Charles Schwab!

So rather than unwrap all that for a HSA-to-HSA stock transfer, my insurer's HSA only supports the liquidate and HSA-to-HSA cash transfer option.
[End Rant - wow, I feel so much better!]

Because of the triple tax advantages of HSA accounts, I've always paid out of pocket rather than from the HSA. So one slight improvement to my plan: I'm going to add all those payments up and claim them back tax free from the HSA before returning to the UK. I'm also leaving everything until the end of quarter (5 days from now) since the mutual funds I'm currently invested in have a habit of issuing unannounced dividends and/or capital gains at the end of random quarters.

It sounds like you have been through the ringer getting all the options sorted out. Wow!

I shouldn’t sweat the dividends thing too much trying to time it exactly right because there really isn’t much in it as the share price of a stock or fund (NAV) always goes down when a dividend pays out. For example if a share is worth $100 and then pays a dividend of 2% the share price drops 2% to $98 so at the end of the day the total of dividend + share price is $100.  This fact is best known when buying shares, with the mantra “don’t buy the dividend”, because if you buy buy shares just before they pay out a dividend you end up with fewer shares without the benefit of getting the dividend.

I agree with not trying to time the market, and with the market already baking the cost of the dividend into the stock price.

My issue is zombie accounts ^{rising from the grave} :-)

I once tried to close a Morgan Stanley ESPP account (my employer had changed broker, and I was consolidating my accounts). I wasn't aware when I cleared out the account that I was past the ex-dividend date for the stock. Since dividends are paid on the dividend date to whoever was the holder/brokerage of record at the ex-dividend date, when the dividend was paid, it resurrected the the Morgan Stanley account!

So I do another transfer and request the account be closed again...

But a few weeks later, the account is resurrected again... with a balance of $0.01!

Morgan Stanley had paid me interest for the portion of the month I'd had cash in the account.

Anyway, it's left me somewhat paranoid! In theory, I should be able to find the ex-dividend date for each stock (I saw in my feed this morning, one's just paid), but it's easier to just wait until the end of the quarter (June 30th).

For the benefit of the thread and for search engines:

HRMC confirmed to me HSAs are not recognized in the UK. Exact (and complete) wording was:

"Yes you are correct, the UK does not recognise the HSA wrapper.
Capital Gains tax is the difference between the sale price and the purchase price. The UK uses the purchase price rather than the residency date."

I think that also confirms selling and repurchasing the stock before returning to the UK will reset the stock price for UK capital gains purposes, but just to be sure, I've asked a follow up in a more direct 'yes/no' way.

For the benefit of the thread and for search engines:

HRMC confirmed to me HSAs are not recognized in the UK. Exact (and complete) wording was:
I think that also confirms selling and repurchasing the stock before returning to the UK will reset the stock price for UK capital gains purposes, but just to be sure, I've asked a follow up in a more direct 'yes/no' way.

Thanks for posting this confirmation of what the rules are.

I’m sure that selling and repurchasing the stocks before returning to the UK will reset the price. If in future some stocks are sold then the calculation of capital gain will be from the price of the stock when it was purchased, in £s of course, the exchange rate on the day of purchase being important.