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How to help US expats navigate their wealth goals

This article is part of
Guide to advising US expat clients

“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.