Investment Accounts For Expats in The US

For UK expatriates residing in the United States, understanding investment options, tax implications, and pension management is crucial for financial security. This article provides an in-depth guide on key financial considerations, including ISAs, investment accounts and tax obligations.

How Do My UK Investment Accounts Work In The United States?

US taxation applies to foreign investments outside US based tax-advantaged wrappers. Typical US capital gains tax rates range from 0% to 15% upwards, depending on the type and amount of investment, as well as your marginal rate of income tax. For a full breakdown of capital gains tax in the United States, see the IRS guide here.

How Does My ISA Work In The US?

Expats cannot contribute to ISAs once they become non-UK residents. Expats should also note that once you move to the United States, an ISA no longer retains it's tax efficiency as it is not a recognised tax-wrapper in the US.

However, you can still maintain existing ISAs without making additional contributions.

Note, it is highly likely your UK ISA contains PFIC investments, which we cover below.

Avoiding Passive Foreign Investment Companies (PFICs)

A Passive Foreign Investment Company (PFIC) is a type of investment which attracts punitive charges from the IRS. It's vital you check your UK or international investment accounts to make sure you are not holding any as you reside and pay tax in the US.

Note, most UK mutual funds and commonly held ISA investments will be classed as a PFIC in the United States, so make sure to speak with an SEC regulated advice firm such as ourselves to optimise your investment strategy from a tax perspective.

Why Should British Expats in the U.S. Avoid PFICs?

For British expats living in the U.S., investing in PFICs can create significant tax and reporting burdens:

    • Unlike U.S. domestic investments, PFICs are taxed at the highest individual income tax rate (up to 37%) rather than favorable long-term capital gains rates (typically 15-20%).

    • Gains are often taxed as ordinary income, even if they would normally qualify as capital gains in the UK.

    • Each PFIC investment requires Form 8621, which must be filed annually.

    • Filing is complex and costly, often requiring professional tax assistance.

    • If gains are not taxed annually under a qualified election, they may be subject to interest charges for the period the investment was held.

    • This can lead to significant additional tax liabilities.

    • Avoid non-US Mutual Funds and ETFs – these are typically classified as PFICs.

    • Invest in US domiciled funds - use US based mutual funds or ETFs to benefit from lower taxes and simpler reporting.

    • Use a Qualified Electing Fund (QEF) or Mark-to-Market (MTM) election - these methods can reduce tax burdens but require early election and compliance.

  • For British expats in the U.S, avoiding PFICs is crucial to minimise tax liabilities, reduce reporting burdens, and optimise investment growth. Instead, focusing on US domiciled investments provides better tax efficiency and compliance with U.S. tax laws.

Best Financial Planning Practise When Moving To The US

If you intend on remaining in the United States long-term, whether that's to work or for your retirement, typically speaking it is best to look at cashing in your UK assets and investment accounts to ensure compliance with the IRS.

Whilst this will initially come with a potential tax bill, it will save you a lot of money and headaches in the future when it comes to tax returns and paying your capital gains tax filing.

Furthermore, like the UK, the US has tax-advantaged investment accounts with similar features to UK ISAs or pensions - for example, you could reinvest proceeds into a Roth IRA or alternative saving plan.

US Investment Accounts For British Expats

At The Wealth Genesis, we provide bespoke, independent and regulated investment advice to UK nationals in the United States, as well as US expats in the UK.

All our advisers are dual qualified, with UK level 4 qualifications and US Series 65 licenses, giving us an in depth knowledge of cross-border matters. To understand how we can help you, schedule an initial discovery meeting with a member of our team using the diary below.

FAQs

  • You can, however you need to be very careful. Most unit trusts, ETFs and mutual funds will be classed as a PFIC, resulting in punitive taxation.

  • Consult with an SEC regulated financial adviser and be sure to use US domiciled assets to ensure you don't fall foul of IRS rules.

  • They are taxed at the capital gains tax rate, and the exact rate will depend on the total amount of income you earn in any given tax year.