What to know about expat Americans living in the UK

  • To understand some of the financial complexities US expats face when living in the UK
  • To learn about the treatment of savings wrappers, such as Isas and Sipps
  • To grasp how to approach assets being brought in from offshore

In much the same way as in the UK, the US investment industry is dominated by mutual funds, index funds and more recently exchange-traded funds (ETFs).

Unless these have ‘reporting status’ in the UK, they fall under the UK offshore fund rules which results in any proceeds being taxed at UK income tax as opposed to potentially more favourable capital gains or dividend tax.

Investment products

Much like investments there are some very common products used in the UK that Americans must handle with care.

Isas (Individuals Savings Accounts) for UK savers are very popular for tax-efficient investing.

The government will allow an individual over 18 to invest £20,000, in the 2017 to 2018 tax year, of after-tax money into an Isa. This money will grow free of all tax while it is invested and - on top of this - the proceeds can be withdrawn at any point, also without being taxed.

The IRS, on the other hand, does not recognise these products. This means that they are viewed for tax purposes in the US like any other general investment account.

There is a common misunderstanding that because the IRS does not recognise the Isa wrapper, they "do not work" for Americans.

This is not the case. While US tax rates remain, for the most part, higher than the UK tax rates, an American living in the UK should take advantage of the Isa allowance before investing in a standard general investment account.

The investments within the wrapper are not subject to the higher UK tax rates but, instead, to the more favourable US tax rates.

Although the difference in the tax rates may be small it still makes sense to take advantage of this difference while it is around.

Once this is understood it is just a case of ensuring that the actual investments within the wrapper are not tax disadvantageous. This is achieved by ensuring the Isa wrapper selected allows for investments such as those discussed earlier.

The different treatment of these products by the UK and US is a common cause of mistakes. Many UK Isa providers will only allow the underlying investments to go in funds, so the individual will automatically be investing in PFICs.

Being selective is vitally important. Although most funds outside the US fall foul of the PFIC rules, there are a handful that have made an election to be treated as a qualifying fund for US purposes.

These are few and far between but are available. Ensuring that the fund maintains this status is imperative.

There is a similar solution for the UK offshore fund rules.