An Investment Guide for US Citizens in the UK

As a US citizen living in the UK, you'll be familiar with the unique challenges you face when it comes to managing your investments. 
 

The complex interplay between US and UK tax systems can make it difficult to make informed financial decisions. So to help, we've created this guide to highlight the key issues and help you navigate the investment landscape more effectively.

Tax Obligations for US Expats
 

US Tax Obligations for US Expats
 

One of the most significant challenges for US citizens abroad is the requirement to file US tax returns, regardless of where they reside. 

The United States is one of the few countries that taxes based on citizenship rather than residency. 

This means that even if you're living and working in the UK, you're still obligated to report your worldwide income to the Internal Revenue Service (IRS).

Key points to remember:
 

• You must file US tax returns annually
   
• You need to report your global income
   
• The US-UK tax treaty helps prevent double taxation, but doesn't eliminate all tax obligations

UK Tax Obligations for US Expats
 

Being a UK resident means you're also subject to UK taxation. Your tax status in the UK will depend on your residency and domicile status. 

If you are a UK resident, you'll likely be liable for UK taxes on your UK-sourced income and gains. 

Depending on your domicile status, it's important to be aware that you may also be taxed on your worldwide income.

Key Issues for American Expats
 

Foreign Account Tax Compliance Act (FATCA)
 

FATCA was introduced in 2014 and has significantly increased the reporting requirements for US citizens with foreign financial accounts. 

Under FATCA:
 

• Foreign financial institutions must report on the assets held by their American clients to the IRS
   
• US citizens with foreign financial assets exceeding $200,000 during the tax year need to complete Form 8938 alongside their regular tax return (Form 1040)

Foreign Bank Account Report (FBAR)
 

FBAR requirements mean if you have non-US bank accounts or investment accounts with an aggregate balance of $10,000 or more, you'll need to file an FBAR (FinCEN Form 114). Failure to do so may result in penalties.

Limited Access to UK Financial Services
 

Another often overlooked challenge for US citizens in the UK is that there is limited access to financial services. 

This issue stems from the complex reporting requirements imposed by US regulations above, and in particular, FATCA.

Reluctance of UK Financial Institutions
 

Many UK banks and financial institutions are hesitant to take on US citizen clients due to:

• The extensive reporting obligations under FATCA
   
• The risk of severe penalties for non-compliance
   
• The additional administrative burden and associated costs
   

Therefore, as a result you may find that:
 

• Some UK banks refuse to open accounts for US citizens
   
• Certain investment platforms and products are off-limits
   
• Mortgage options may be more limited

Lack of UK Financial Advisers for US Expats
 

The added complexity of dual US-UK taxation also affects the availability of financial advice because:
 

• The vast majority of UK financial advisers do not work with US persons
   
• Many lack the specialist knowledge required to navigate both tax systems
   
• Those who do offer services to US citizens often charge higher fees due to the additional complexity

The PFIC Trap: A Major Investment Challenge
 

What is a PFIC?
 

A Passive Foreign Investment Company (PFIC) is subject to strict and complicated US tax rules. 

Most non-US mutual funds, including popular UK investments like unit trusts or funds held within ISAs, are classified as PFICs by the IRS.

The Problem with PFICs
 

For US expats, investing in PFICs can lead to:

• Punitive tax treatment by the IRS
   
• Higher tax rates compared to similar US-based investments
   
• Expensive and complex reporting requirements (IRS Form 8621)

The UK Side: Offshore Funds
 

While avoiding non-US funds seems like an easy solution, it creates another problem. 

The UK has its own rules for "offshore funds" (which include most US-based funds) which means:
 

• Gains from these funds are treated as "Offshore Income Gains" (OIGs)
   
• OIGs can be taxed at up to 45%, rather than the more favourable capital gains rates

Investment Options for US Citizens in the UK
 

Given these complexities, its easy to feel like you have very few options. However, it is worth considering the following strategies, each with their own set of pros and cons: 

1. Individual Stocks and Bonds
 

Pros:

• Avoids PFIC issues
   
• Straightforward from a tax perspective

Cons:

• Requires a large portfolio (typically >$10 million) for proper diversification
   
• Can be more time-consuming to manage

2. US Funds with UK Reporting Status
 

This is often the best solution for many US expats in the UK.

Pros:

• Avoids PFIC issues for US tax purposes
   
• Qualifies for normal UK tax treatment on capital gains
   
• Allows for diversified, low-cost investing

Cons:

• Limited selection of funds available

3. UK Pensions and US Retirement Accounts
 

Thanks to the US-UK tax treaty, qualified retirement accounts from both countries receive favourable treatment. These include:
 

• US IRAs and 401(k) plans
   
• UK pension schemes, including Self-Invested Personal Pensions (SIPPs)

Investments held within these accounts generally avoid PFIC and offshore fund issues.

Key Considerations for US Citizens in the UK

1. Avoid PFICs: Steer clear of non-US mutual funds and ETFs, including those held within ISAs.
    
2. Understand tax implications: Always consider both US and UK tax consequences of your investment decisions.
    
3. Keep detailed records: Maintain comprehensive records of all your financial accounts and investments.
    
4. Stay informed: Tax laws and treaties can change. Keep abreast of these changes for effective financial planning.
    
5. Seek professional advice: because of the complexities involved, it's crucial to work with financial advisors and tax professionals who understand both US and UK tax systems.
    
6. Regular reviews: remember to regularly review your investment approach as your circumstances and the regulatory environment may change over time.

It's clear that navigating the investment landscape as a US citizen in the UK can be challenging. 

However, with the right knowledge and guidance, you can build a tax-efficient investment strategy that works on both sides of the Atlantic. 

To help US citizens with their UK Investments, we have recently launched our US expatriate service! For expert help, you can get in touch with, or request a call back from our US team.