Junior ISA … or any other saving option?

Hi there,
A few days ago I had a simple thought that we should start putting aside some money for our newborn daughter but fast forward a few days later and I’ve entered the weird world of international tax rules, FATCAs, PFICs and whatever other confusing abbreviations they have. A myriad of hell. Very new to this so everything is confusing still.

In a nutshell - wife is American, I’m British and our newly born daughter is … AFAIK not American yet but not 100% sure. She doesn’t have a passport, we live in the U.K. and we haven’t applied for US citizenship for her but pretty sure that we will at some point.

Questions:

• Does my daughter automatically become a US person?
• What saving option would you recommend? Junior ISA in the U.K. under my name vs some US account under my wife’s name?
• Assuming we invest in a Junior ISA in the U.K. I understand from my current provider that if my daughter becomes a US person, we can no longer put money away and she’ll only be able to withdraw them at 18. I’m guessing that’s the situation across the board probably as they don’t want to deal with the IRS. Are you aware of any Junior ISA providers who would take my daughter?
• Assuming we want to invest in the U.K. under my name, should I just put a small amount of money into our normal ISA (making sure we don’t breach the max allowance)? Would that money get taxed later down the line if I “gift” it to her? Do you see any problems with this approach?
• Assuming we invest in the states under my wife’s name, what are the tax implications and how complicated is the filing in the U.K. and US?
• If we invest under my wife’s name, what are the “PFIC restrictions” (I saw that mentioned somewhere)? US funds should be okay correct?

Sorry for the myriad of questions and thanks very much for your input. Bit lost.

Cheers

Don’t know the answer to many of your questions but if you open a junior cash ISA then it won’t run ever run afoul of PFIC and won’t need reporting under FBAR or FATCA until the total exceeds $10k even if she is a USC.

Currently under UK law you can gift someone as much as you like with no tax implications at all if you live for at least 7 years after making the gift - we did this with our son in 2017.

If your wife invests in the USA she will have to pay taxes on any income from the investments along with all her other US income but there are no PFIC implications and also no UK PFIC implications as long as she invests in HMRC Reporting funds.

To try and answer your first question, try here:

https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Acquisition-US-Citizenship-Child-Born-Abroad.html

@durhamlad has answered the tax & investment issues - just be careful and plan it out and ahead - filing US tax returns is a pain but more so for those with complex investment strategies. Reading the US/UK Tax Treaty may also help you.

Thanks @durhamlad.

also no UK PFIC implications as long as she invests in HMRC Reporting funds.

Ah didn’t even know about the HMRC bit. So this the list of “HMRC Reporting Funds”?

https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds

If your wife invests in the USA she will have to pay taxes on any income from the investments along with all her other US income

Does she need to fill a self-assessment in the U.K. and pay tax here?

Thanks @Smitch . If I’m interpreting the below correctly, I believe she’s automatically a US person from birth. That means that the Junior ISA is not even an option with my provider at least. 

A person born abroad in wedlock to a U.S. citizen and an alien acquires U.S. citizenship at birth if the U.S. citizen parent has been physically present in the United States or one of its outlying possessions prior to the person’s birth for the period required by the statute in effect when the person was born (INA 301(g), formerly INA 301(a)(7)).

For birth on or after November 14, 1986, the U.S. citizen parent must have been physically present in the United States or one of its outlying possessions for five years prior to the person’s birth, at least two of which were after the age of 14.

Thanks @durhamlad.

Ah didn’t even know about the HMRC bit. So this the list of “HMRC Reporting Funds”?

https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds

Does she need to fill a self-assessment in the U.K. and pay tax here?

Yes, that is the list of funds. It is a very large list.

If she has foreign income then she will have to file HMRC self assessment. Our son works in England and ensures that he has no US income so pays his taxes with PAYE

1. Yes - I was under the impression that a person with a right to be a USC should travel on a US passport. This is what we've done with my son who is a USC via my citizenship. My husband is a UKC.

For my son, we have a cash Junior ISA which is fine for tax purposes in terms of avoiding the PFIC. Just note that any interest is taxable in the US, though this should be well under the threshold for IRS reporting considering the poor interest rates at the moment (unless you have loads of cash to save!!). I have not had to file an IRS return for my son yet, though he does have more than $10k so I've reported his accounts on FBAR for a few years now.  His JISA account is with NS&I and they were OK with taking him as a US person. Many places are not, and this is a pain for both of us.

In terms of investments, I did have a JISA invested in funds but realised this was PFIC and therefore very unfavorable for him long term. I've sold the investments and it's just cash now until I work out what to do.  If I were to do this all over again (he's 16 now), I would probably invest for him in my husband's name as a UKC and then work out how to give him the cash at some later date. JISAs are always inaccessible until they are 18, regardless of their nationality.

As a USC, I've found it tricky to invest from the UK. I haven't lived in the US since I was 21 (am 45 now!) so I have no financial ties there and can't open a US brokerage account. There used to be some US ETFs that were also UK reporting, thus avoiding problems both ways....but these aren't available anymore in the UK due to some EU regulations. I now invest in individual shares with Hargreaves Lansdown who were one of the few UK brokerages that would take me,  and keep careful records of this for my tax returns. If you have $25k to invest, you can use Charles Schwab UK to invest in dollars in the US stock market. Again, I believe this is only individual shares rather than funds/ETF.

Good luck! I sometimes regret inflicting USC status on my poor child  .

Thanks for the suggestions @lemonjaffacake! I’ll start researching them asap

Just note that any interest is taxable in the US, though this should be well under the threshold for IRS reporting considering the poor interest rates at the moment (unless you have loads of cash to save!!).

What is the threshold for IRS reporting?

I have not had to file an IRS return for my son yet, though he does have more than $10k so I've reported his accounts on FBAR for a few years now.

I thought all that was part of the tax return but may have been wrong (only filed once zero income for my wife so very little knowledge). How do you “report on FBAR”?

Thanks for the suggestions @lemonjaffacake! I’ll start researching them asap

What is the threshold for IRS reporting?

I thought all that was part of the tax return but may have been wrong (only filed once zero income for my wife so very little knowledge). How do you “report on FBAR”?

The single standard tax free deduction for 2021 is $12,550 but to check if you should file there is an easy to use question and answer section

https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

FBAR reports are quite different to your tax return and you report balances here

https://www.fincen.gov/report-foreign-bank-and-financial-accounts

If your balances are MUCH higher then the balances are also reported  as part of your tax return (>$200k) This is FATCA.

https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-us-taxpayers

As far as the options for saving/investing for a kid, you've got some options. I'm assuming that your wife is filing her US taxes as "married filing separately" or "head of household", thus keeping you out of the US tax system - if you're "married filing jointly" and you're both in the US tax system, that narrows your options considerably.

• Easiest is to simply keep any investments/savings for your child in your name only, and eventually gift to your daughter (no US or UK taxes due on the gift in the vast majority of cases - just don't die within 7 years of the gift to avoid any UK concern; won't be any US concern since only the recipient is a US tax resident). You can use any UK vehicle that fits your purposes - an ISA (not junior, an adult ISA in your name only) is the most obvious option, since it's tax-free on any growth. Only constraint would be if you're already using your whole £20K annual limit. If so, you could do a taxable investment account, or, if the timing lines up with when you'd want to give the money to your daughter, a SIPP. You'd be free to invest in whatever you like - no worries about PFICs.
• You can do a Junior S&S ISA for your daughter, but because she is a US citizen, you should only use US-friendly, non-PFIC options. Realistically, that's individual stocks. That's a pain, more expensive, and less diverse, but it is possible. Hargreaves Lansdown is the only ISA provider that I know for sure works with US citizens - I haven't tried to do a child ISA with them, but have an adult ISA and LISA in my (US citizen) name. Don't forget that all ISAs are treated by the IRS as taxable accounts - need to be included on appropriate tax returns, where required, and some tax may be due
• A Junior Cash ISA is fine too - would have to be huge before the US-taxable interest would cause problems. The bigger problem there is the paltry interest rates these days!
  
• Similarly, you can do an adult ISA in your wife's name, in individual stocks. Only real advantage here is that it lets you use her £20k limit as well as your own.
• Don't use a US 529, which is the popular kids saving option in the US. It's mostly useful for university (but UK student loans are far better than US ones), HMRC doesn't recognize the tax advantages, and anything in it is unlikely to be HMRC reporting, so probably gains are taxed as income instead of capital gains. Just ugly.
• A US taxable brokerage account in your wife's name is possible, but just more of faff than most of the above for no real gain. There are challenges opening accounts without a US address (mostly need to use Interactive Brokers or Charles Schwab), and challenges buying what you want (US funds aren't supposed to be sold to UK & EU residents, European funds are PFICs even if held within a US account). If you did this, your wife would include any gains on her HMRC self-assessment and take a foreign tax credit for her US taxes if available, although with the fairly generous UK capital gains and dividends allowances there might not be any credit available, and thus she'd pay real money to the IRS (although the child tax credit could offset it)

Thanks @tubaleiter. Super detailed answer and exactly what I was looking for.

As far as the options for saving/investing for a kid, you've got some options. I'm assuming that your wife is filing her US taxes as "married filing separately" or "head of household", thus keeping you out of the US tax system

Yes, married filing separately

Easiest is to simply keep any investments/savings for your child in your name only, and eventually gift to your daughter (no US or UK taxes due on the gift in the vast majority of cases - just don't die within 7 years of the gift to avoid any UK concern; won't be any US concern since only the recipient is a US tax resident). You can use any UK vehicle that fits your purposes - an ISA (not junior, an adult ISA in your name only) is the most obvious option, since it's tax-free on any growth.

Yea this seems to be the easiest and I’m starting to give up on the other options. HL and NS&I are the only ones that I have found so far that work with US citizens. NS&I is a cash ISA and the return is 1.5% which is peanuts as you say. The problem with HL is that I can’t find any US funds/ETFs which I’m getting the sense that it’s due to some regulation/what you say below. I wouldn’t go for pure stocks as I wouldn’t be able to put together a diverse enough portfolio. So in the end the Junior ISA is realistically not an option for us.

Yea this seems to be the easiest and I’m starting to give up on the other options. HL and NS&I are the only ones that I have found so far that work with US citizens. NS&I is a cash ISA and the return is 1.5% which is peanuts as you say. The problem with HL is that I can’t find any US funds/ETFs which I’m getting the sense that it’s due to some regulation/what you say below. I wouldn’t go for pure stocks as I wouldn’t be able to put together a diverse enough portfolio. So in the end the Junior ISA is realistically not an option for us.

You're right, you won't find any US funds/ETFs on HL - it's the EU (now UK) regulations. Don't necessarily dismiss individual stocks completely - it's not perfect, but you could do some kind of pseudo-indexing approach, some thoughts here: https://www.bogleheads.org/wiki/Passively_managing_individual_stocks  This is what I do in my adult ISA - still a bit of an ongoing experiment, but so far I'm tracking the FTSE 100 reasonably well with 20 stocks

Another approach I've seen some people take is to buy Berkshire Hathaway as a reasonable proxy for the US stock market. Again, far from perfect, but if you put a comparison chart of BRK vs VTI, you can see they're reasonably close.

But both of those are sub-par options compared to just using your own ISA and getting a global tracker ETF, as long as you have space in the £20k annual limit.

Like I said, I have an ISA with just stocks and it does take some time researching stocks etc, but it's do-able. I also manage an ISA in my husband's name with the usual tracker funds, but I wanted to retain some investments in my own name.

If your daughter is super lucky and somehow manages to have have lots of unearned income (interest, dividends) in her own name then the IRS threshold for reporting is $1,100.

https://www.irs.gov/publications/p929

We've  had bank and savings accounts for my son with Halifax and Nationwide and they were OK with his/my status as a US person, if you are looking for other options later on.