The US taxes on a worldwide basis, which can have major implications on how US citizens in the UK manage their money and organise their investments, says Richard List, portfolio manager, Waverton Investment Management
‘Nothing is certain except death and taxes’ – Benjamin Franklin, 1789
Franklin’s famous quote was originally intended as a reference to the newly ratified Constitution, but it is particularly apt in relation to the US system of taxation. Unusually, the United States taxes US persons on a worldwide basis. Expat US citizens, and those with permanent resident status (such as Green Card holders) are required to file tax returns in both the US and their country of residency. This can also have major implications on how they need to manage their money and organise their investments.
The US tax system can also impact so-called ‘accidental Americans’ – those who may not realise that they are impacted, such as those born in the US, or those who inherit citizenship from a parent.
Not only do the investments need to be reported in the US, but they also need to be compliant. Given the complexity of the system, investors in this situation benefit from seeking professional advice on their financial, legal and tax affairs. Most countries, including the UK, have measures to avoid double taxation, but all the appropriate paperwork still needs to be filed.
While the US does tend to recognise UK pensions, other wrappers such as ISAs are dealt with on a look-through basis. Some common investment structures in the UK, such as OEICS and unit trusts, are classified as passive foreign investment companies (PFICs) and gains are taxed as income rather than capital gains, making them very tax inefficient for US persons. Other differences include tax being owed in the US on profits arising from the sale of a primary residence, if above a threshold.
One solution is to renounce US citizenship, a relatively complex process known as ex-patriation. Alternatively, investments can be made in a way to maximise returns while fulfilling all the requirements. By investing directly in assets – owning the underlying stocks and bonds, rather than in funds a portfolio is far more efficient for US persons.
Waverton offers two solutions for US clients, for those with more than £100k or $150k to invest, our model portfolios can be accessed on the Praemium platform via a financial adviser. Alternatively, for accounts of £1m or more, Waverton can create a fully bespoke portfolio. Both approaches include the best stock -picking ideas from the Waverton investment team, and the assets are owned directly. We are also able to include some exposure to alternative assets via compliant, US-registered ETFs. Both Praemium and Waverton can provide the requisite tax booklets covering both the US and UK.