A large majority of British expatriates living in the US tend to have left some form of financial asset back home. This article aims to discuss some of the more common assets that individuals typically leave, or indeed forget about, in the UK and will provide a general outline of how they are viewed and treated once you become a US resident or citizen.
The types of financial assets that tend to be most commonly left behind are rather varied but may include ISAs, Unit Trusts/OEICs, Pensions and Property.
One of the most common UK tax efficient investments for Brits is the Individual Savings Account (ISA). Most people have heard of this kind of investment vehicle and many of us still hold them.
ISAs allow an individual to invest up to a prescribed maximum amount (set by the UK Government each year), which grows tax free, aside from a 10% non-reclaimable dividend tax credit. However, this can be problematic once ISA holders become US residents or citizens. Unfortunately, the IRS does not accept ISAs to be tax free and will expect to receive tax from this kind of asset.
It may become even more problematic if you have a Stocks & Shares ISA, as these are very likely to be considered a Passive Foreign Investment Company (PFIC); PFICs will be covered briefly a little later.
In conclusion, your ISA interest and/or growth will no longer be tax efficient because the investment will be considered taxable by the IRS when you access the fund or sell it (this will remain the case unless you return to the UK and are no longer considered a US citizen or US tax resident).
UK Collective Investment Schemes
UK collective investment schemes allow a number of investors to pool their money together into one fund, which is then professionally managed. This can include Unit Trusts, Open Ended Investment Companies (OEICs), Investment Trusts and Exchange Traded Funds, to name but a few.
Many British expatriates, now living in the US, still holding this type of investment may be unaware that they could be considered as ‘toxic’ assets, at least in the eyes of the US. This term could be deemed as overly dramatic; nevertheless, these assets could well be liable to adverse tax treatment by the IRS. This is due to a piece of legislation in the US, which led to the creation of the term PFIC – Passive Foreign Investment Company.
This piece of legislation is a little known fact for many British expats until they come to sell these types of investments. PFICs are subject to complex and punitive tax treatment and fall into the realm of qualified tax advice. However, it is pertinent to discuss the basic concept relating to this matter to ensure that at least you are aware of the legislation.
When you sell your investment(s) and it is considered to have received an excess distribution, any gain will not qualify for the US long term capital gains tax benefits. Instead all of the gains and/or interest will be treated as ordinary income and will be taxed at your highest marginal rate. In addition, there may be an interest charge applied to the investment, to cover the IRS’s loss of interest for the tax due on the gain, for the holding period where they did not receive any payment.
As a result, it may be prudent to consider removing this kind of investment from your portfolio and invest in more US tax friendly assets.
A large proportion of us still have UK properties back home; either to provide rental income, sell once settled in the US or keep as a haven in case we return one day.
Currently, if you sell your UK property, any gain will be tax free from the UK as long as you have been a non-UK resident for 5 consecutive tax years.
However, this may be liable for capital gains tax in the US unless you qualify for the ‘Home Sale Tax Exclusion’ rule. This effectively allows you up to $250,000 (single)/ $500,000 (married) tax free gain, as long as you have lived in the property for at least 2 of the 5 years prior to the sale. Admittedly, this will not apply to the overwhelming majority of us but it is worth pointing out.
In April 2015, a controversial new tax ruling will become effective. The UK Government will be removing the capital gains tax advantage for UK non-residents, meaning, if you sell your UK property, you may now become liable to pay capital gains tax on gains made from April 2015 to the date of the sale. The UK Government are also currently debating whether to remove the personal allowances that expats currently enjoy. This will have a major impact on expats who receive any UK income and/or hold UK property.
All UK registered pensions are covered by a US/UK Tax Treaty, which allows your UK deferred pension to grow free from tax from the IRS. You will only be liable to pay income tax once it is in payment, just in the same way as with your US pension(s).
Unfortunately, as British expats you are currently unable to transfer your UK pension into the US, as the two underlying pension structures are simply too incompatible. However, you do have an option to transfer your UK pension into a USD denominated personal plan that is specifically designed for British expats in the US. This plan allows you to take advantage of the foreign exchange rate at a time when it suits you and have the funds professionally managed.
We at Alexander Beard have designed such a pension. Named AMVE$T, this personal pension plan is specifically tailored for British expatriates in the US; it is professionally managed, can be held in GBP or USD and provides online access to your portfolio 24 hours a day.
The Alexander Beard Group is an international financial services organisation, who specialise in offering a cross border financial services and advice to British expatriates. Our head office is based in the UK and we also have offices in Australia, New Zealand, Europe, South Africa, Canada and the United States. We offer specialist cross border knowledge and expertise to expatriates that may need advice due to having financial interests in both of the countries they have ties with.
Please feel free to contact firstname.lastname@example.org, if you would like any assistance regarding your financial position in the US or the UK.
This article is for information purposes only and is not to be considered as financial or tax advice. We are not tax advisers. Investments can fall as well as rise and past performance is no indication of future returns. This article is from Alexander Beard (USA) LLC.Posted In : Expatriate, Emigration, UK, Property