How to be a US expat and invest in US equity funds

This is unsurprising as the Internal Revenue Service, also known as the IRS, scrutinises every US citizen and green card holder wherever they live.

This often means that US citizens could still be subject to US taxation and may well have to adhere to the taxation of the country they reside in. 

PFICs

Mihir Kapadia, chief executive of Sun Global Investments, confirms: “US citizens in the UK need to be aware of the laws and legislation in place before investing, especially with the Foreign Account Tax Compliance Act (FATCA) which sees UK financial institutions reporting directly to the IRS about US clients.”

He adds: “Americans also need to take into consideration the fact that they are taxed regardless of where they live in the world, and will have to be aware of any investments they have chosen to keep in the US, as both countries will take this into consideration.”

The IRS is having a field day with investments falling under PFIC regime by imposing high tax on those investments  Sigita Dromantaite

Keith Poniewaz, director of international advisory services at Walkner Condon, points out that non-US domiciled funds are tax toxic in the US because they are considered passive foreign investment companies (PFICs) for US purposes.

A PFIC is a foreign based corporation which has two characteristics. Either at least 75 per cent of the corporation’s gross income is “passive”. Or at least 50 per cent of the company’s assets are investments that generate income through earned interest,  dividends or capital gains. 

Sigita Dromantaite, director at US and UK Eagle Taxation, says: “The IRS is having a field day with investments falling under PFIC regime by imposing high tax on those investments.”

She adds: “I have seen people losing lots of money and I mean really thousands and thousands of dollars when the poor souls find out that all investments they have in their investment portfolios are PFICs.”

Tax-friendly investments

If PFICs cause more pain than gain to US expats, which US equity funds can be useful for those living in the UK? 

Mr Kapadia thinks investors should consider being very selective with their investments and there are currently a small number of US mutual funds and ETFs which are eligible to be taxed in the same way as other UK funds.

This includes investing in individual stocks and bonds and also having the possibility to buy individual stocks that qualify for advantageous tax treatments. 

Ms Dromantaite says: "While it may look as not that profitable, investing directly in shares globally is OK [as the] PFIC regime does not apply.”

She explains that investing directly in corporate bonds and registered funds could also be options as none of them fall under the PFIC regime. 

However she warns: “The UK tax authority may subject them to UK punitive ‘non-reporting fund’ tax regime. This may be a huge problem for US citizens or green card holders living in the UK for a long period of time.”

Reporting fund status 

Mr Kapadia highlights that it is possible for US citizens or green card holders to invest in US registered funds with UK “reporting fund tax status”. 

Ms Dromantaite shares the same view. 

She says: “These investments will give the best return on investments for the US citizen or green card holder while not subjecting them to US PFIC or UK “non-reporting fund” tax regimes.”

Reporting funds are obliged to report details of their income to their UK resident investors and HMRC whether or not the income has been distributed. 

Conversely, a non-reporting-fund is not required to report details of its income. UK resident investors will only be liable to pay income tax on the income that has been distributed to them from the fund. 

ETFs

Mr Kapadia says there are a number of ETFs that satisfy the “reporting-fund” status that allow for a diversified portfolio. 

He says: “Therefore, although it is a complicated situation, it is not impossible and it is recommended that investors seek the advice of an experienced manager who will be able to guide them every step of the way.”

Mr Poniewaz says US expats can find information about the US funds that are UK-reporting via the HMRC website, which keeps an updated list of these funds.

But he warns that US expats should be aware of recent EU restrictions on Packaged Retailed Investment Products which may restrict their ability to buy those funds. 

PRIIPs regulations, came into effect in January last year and imposed new calculation methodologies and transparency requirements investment products across the EU. 

Mr Poniewaz adds: "The list contains both mutual funds and ETFs. There are both actively managed and index funds on the list."

saloni.sardana@ft.com