How to help US expats navigate their wealth goals

This means remaining UK tax efficient, while at the same time being mindful of US tax rules and implications.

While it is true that investment options available to US expats living in the UK are limited, there are things advisers can do to help their US expat clients invest in a way that avoids unnecessary and burdensome investment tax traps.

The first step for a US person coming to the UK, or those who have been living in the UK for many years, is to establish a UK tax status.

Establish tax status

Advisers must first clarify whether the client is a non-dom – someone living in the UK considered under British law to be domiciled in another country – and how long they have been residing in the UK, says Daniel Freedman, managing director and co-founder of London & Capital.

If the client has been living in the UK for less than seven years, they will only need to pay tax in the US on their investments – as long the investments are kept outside of the UK, says Mr Freedman.

US citizens in the UK will, in principle, face UK tax on worldwide income and gains, together with US tax on a worldwide basis.Simon Gorbutt

He adds: “From a US point of view, you are taxed on a worldwide basis under the US tax regime and it doesn't matter where you live; from a UK point of view, you have the domicile rules to consider.”

Indeed, US nationals living in the UK face a series of unique challenges, not least because they will often bring with them their US tax-paying status, notes Simon Gorbutt, director of wealth structuring solutions at Lombard International Assurance.

Mr Gorbutt explains: “US citizens in the UK will, in principle, face UK tax on worldwide income and gains, together with US tax on a worldwide basis.”

While some clients in this situation may be able to use the UK’s remittance basis – some tax credits might be available depending on how long they have lived in the UK – the overall compliance burden can be high, he adds.

From an investment perspective, this can lead to major hurdles.

But, while US taxpayers could find the universe of investments available to them in the UK extremely restricted, it is not impossible for advisers to find tax-efficient investment solutions.

Define wealth goals

Andrea Solana, head of advanced planning at Maseco Private Wealth, says having clearly defined personal wealth goals and objectives are step one of determining an appropriate investment strategy and asset allocation.

Ms Solana explains: “When you are a US person paying tax in the UK on an 'arising basis', it is important to look closely at the structure of both onshore and offshore assets.

“For any assets that are held outside of a recognised tax wrapped structure, such as a UK occupational pension scheme, you should ensure that the underlying assets you own are tax efficient, not only from a US perspective but also from a UK perspective.”

Doing so will help clients avoid unnecessary and disadvantageous tax charges.

In this respect, it is a good idea to avoid Passive Foreign Investment Companies (PFIC) and offshore funds, to ensure clients preserve the capital gains tax status on their investments.

Mr Freedman explains: “If you have an Isa, and you have funds inside your Isa, they would be considered by the US 'taxable' as PFICs.

“Isas are very good for US expats living in the UK, but you need to make sure that you're investing in assets that qualify both in the US and the UK.”

While any offshore collective investments that do not have UK reporting status will attract offshore income gains (OIG) taxation, as opposed to capital gain treatment.

So it is better to address the inclusion of OIG assets within the investment structure sooner rather than later, suggests Ms Solana.

But what about pension funds?

Generally, on the basis that they have not taken any benefits or income from their pension scheme, the build-up of your client's pension retains its tax-free status in both countries.

But, there are some issues relating to pensions.

Firstly, if a client transfers their money from one pension to another – some financial advisers have been advising Americans to move their money to qualifying recognised overseas pension schemes (Qrops) – that would be a very bad move, says Mr Freedman.

He explains: “Any move from a UK pension to a Qrops would be taxable on the total amount of money, at their highest income tax rates in the US.”

While pension funds can be very beneficial from a US point of view, advisers and their clients have to be very careful about making sure that they do not move the fund to a non-recognised pension scheme.

One option to alleviate some of the above concerns is to use dual compliant insurance and annuity contracts – these are efficient in both countries simultaneously, allowing for long-term tax efficiency, suggests Mr Gorbutt.

“However, equally important is that the counterparty of the investment manager or bank is the insurer which can be more appealing to those institutions than dealing directly with a US connected individual,” he adds.

Currency fluctuations

Advisers and their clients will have to manage the currency aspect carefully, to make sure they are tax efficient.

If a client owns British investments, they must report them to the US in dollars; if they have UK investments, they have to report their US investments to the UK in sterling, notes Mr Freedman.

He explains: “As a US citizen living in the UK, you have to report your taxes in British pounds, but as a US citizen you also have to report your taxes in US dollars – this often brings in a lot of confusion because the exchange rate has moved quite substantially.

“So, before you sell an investment you need to take care that the currency doesn't involve making a bigger taxable gain.”

Key things to think about ahead of the US tax year end:

• US dollar capital gains planning on global assets
• Foreign tax credit planning opportunities
• Annual gifting allowances
• Charitable giving, US/UK efficiency
• US pensions, required minimum distributions each year
• US/UK pension planning
• Currency exposures

victoria.ticha@ft.com