Britons moving to the US: your tax, pension and investment questions answered
Britons moving to the US: your tax, pension and investment questions answered
Are you a UK citizen planning to live or work in the US? If so, you join a group of over a million Britons who’ve made this move and who, as a result, have to comply with USA’s demanding tax regime. Schroders invited Scott Barber, Partner at London-based tax specialist Buzzacott, to talk about the considerations a British national has to consider when moving to the US.
The following guide sets out some of the key considerations you’re likely to encounter relating to your finances. We look at how the status of your existing UK assets – ISAs, work pensions, SIPPs, and other investments – might be affected following your move. And what about your UK home? Decisions you make now, regarding whether or not to sell your property or rent it out, could have tax consequences in the future.
It is important to understand that the US operates a calendar tax year and all reporting has to be denominated in dollars. That alone can be significant where capital assets are involved, and for US reporting purposes you may report a mix of outright market value change, as well as changes arising from the movement of currencies.
Taking up residence in the US is likely to involve major cultural, social and other changes for you and your family. It’s also likely to complicate your financial and tax affairs. But with careful planning the impact and cost of the latter can be reduced.
Becoming a US resident? Beware – it can impact on every aspect of your financial life
Tax is the UK is comparatively simple compared to the US’s tax regime. There are several key differences to get to grips with:
US tax regime vs UK tax regime: if you become a “US person” you are likely to have to file returns to US authorities – reporting on your worldwide income and assets
Difference number one is that if you become a US citizen or a green card holder in the US, your worldwide income becomes subject to US taxation – even if and when you return to the UK or move to another country in future.
If you become resident but not a citizen or green card holder, the IRS will treat you generally as it treats a US citizen only whilst you remain resident there. What constitutes “resident”? If you are moving to the US for full-time employment, you are likely to meet the requirements of the Substantial Presence Test. The exact IRS rules are tricky, involving average numbers of days during which you are resident across periods of several years.
London-based US tax adviser Scott Barber of Buzzacott sounds a warning. “Unless you want to live in the US permanently, why would you want a green card? Why would you want to become a US person? That’s the point at which you get sucked into the rules and regulations which can become very difficult and onerous.”
Bear in mind that when you eventually come home, you may remain tax resident in the US for a period of time depending on the number of days’ presence you had over the previous three years.
US tax regime vs UK tax regime: the US federal and state income taxes
The second difference is that the US operates two layers of income taxation: firstly there are the federal rates, which as in the UK, are tiered. In the US, the top federal rate is 37% (applying to income for an unmarried individual of over $500,000).
On top of this US states apply their own income taxes: living in New York for instance, will add a further 9% to your income tax rate.
Your UK bank accounts, ISAs and other UK-based investments and holdings: what are the implications when you move to the US?
It’s likely that you’ll want to keep bank accounts, investments, property and other assets in the UK if you’re moving to the US only temporarily, or if you’re uncertain how long you will remain there.
It’s advisable first to check that your UK provider – a bank or investment manager, for instance – will be prepared to continue operating your accounts once you become a US resident. Many will not want – or be able – to act for US residents because of SEC and tax regulations.
There are several key considerations to be aware of.
The US authorities will require you to report overseas investments and bank accounts (FBAR)
FBARs – Foreign Bank Account Reports – are one of the most important reporting requirements you’re likely to face once you’ve emigrated from the UK to the US. FBARs had their origins in the Bank Secrecy Act of 1970, which was aimed at cracking down on money laundering and other financial crimes.
In essence you are expected to file an FBAR – effectively reporting the value of your account balances – if the total value of all of your non-US accounts is more than $10,000 on any day in the tax year, even if it’s split between two or more accounts. This total is calculated using a foreign exchange rate calculated on 31 December.
It could be cash in a bank account, or investment portfolios or personal pensions – under the FBAR rules you’ll need to report them.
Planning ahead before your departure, including consolidating accounts, can simplify this FBAR reporting process. The 15 April deadline for reporting is the same as the deadline for your tax return, but your FBAR report is filed separately. Failure to report can result in hefty penalties: even if your failure is classed as “non-wilful” the fine can be as high as $10,000. For failures judged to be wilful, penalties can be $100,000 or 50% of the undisclosed sum – whichever is the higher figure. The IRS will generally extend the filing date to 15 October but the US takes filing deadlines very seriously and the IRS can be rigid about enforcing them.
Some of your existing UK investments are likely to be taxed harshly by the US (PFICs)
A “Passive Foreign Investment Company” – or PFIC – is a term applied by the US authorities to a range of commonly held investments such as mutual funds.
In the UK for example we have unit trusts and open-ended investment companies (OEICS). But these vehicles need to be established in a certain way if they are not to be treated by the US Internal Revenue Service as Passive Foreign Investment Companies (PFICs). Most are not.
PFICs are taxed more severely by the US tax authorities than other assets. As a result, US investors in the UK or elsewhere should avoid owning them.
UK-recognised tax breaks, like ISAs, won’t be recognised by the IRS when you move to the US
The IRS doesn’t recognise the ISA as a tax-proofing wrapper in the way the UK’s HMRC does. From the IRS’s point of view, the ISA doesn’t exist – and the IRS is therefore only interested in the investments held inside the account. And it will apply tax as if these same investments were not within an ISA.
Again, the PFIC conditions will apply. So if your ISA contains UK unit trusts, for instance, they may become subject to harsher tax treatment – as described above.
Again, it can really pay to seek advice before you leave. One possible course of action is that investments within your ISA could be switched into new holdings which meet the IRS’s requirements. If so, advice might be required to ensure these new investments still meet your risk criteria and your long-term objectives.
Where your existing holdings are outside of an ISA it may be more difficult to swap these for IRS-qualifying holdings without realising a capital gains tax bill. Again, it’s worth seeking advice from a specialist investment advisor.
Bear in mind that if you keep your ISA open while you are a US tax resident, the UK tax advantages will remain in place but you cannot make further contributions or open new ISAs while you are abroad.
Are you moving to the US while owning or controlling a UK company?
Again very specific reporting requirements will apply if you move to the US and continue to own UK businesses or part of UK businesses. These requirements come on top of FBAR rules.
What happens to your UK personal pension (SIPP) after you move to the US?
After your UK property, your pension is likely to be one of your biggest assets. And for Britons who move to the US it poses a number of problems.
UK pension providers probably won’t want to continue providing your SIPP when you emigrate to the US
Many of the UK’s biggest SIPP providers – including most of the big broker platforms, insurers and wealth managers – won’t work with US resident customers, even if these are originally UK customers who have spent most of their working lives in the UK. This can leave Britons or other nationals who move to the US in a quandary, as their investments are likely to continue to need management.
If you’ve got a UK SIPP and you’re emigrating to the US, you need to register to keep your SIPP investments safe from the IRS
By default, the IRS does not recognise a SIPP as a pension structure entitled to favourable tax treatment. This is similar to the situation with ISAs. But with pensions it is possible to apply to the IRS to have the SIPP recognised as a pension, protecting its tax-advantaged treatment.
Scott Barber of Buzzacott says: “It can be difficult to work out the treatment of both contributions and distributions, particularly where tax relief applies.”
Selling or renting out your UK home when you’re living in the US: what are the tax implications?
Many people emigrating to the US will keep their UK home, perhaps letting it in their absence, but rental income will need to be reported to the IRS.
More importantly, homeowners need to consider that if and when they sell their UK property in future, they may incur a capital gains tax liability under the American tax regime. In the worst case they could end up with capital gains tax liabilities in both countries. A broad understanding of how these taxes work would be helpful where there is even a small chance that the property might be sold.
There are other property-related quirks in the US tax system. One is that currency-related “gains” made on mortgages could become liable to US tax.
Scott Barber says by way of example that if a £1m original mortgage was taken out when £1 was worth $2, but redeemed when the pound had fallen to $1.50, the IRS would perceive a taxable “gain” of $500,000.
Need help? Our London-based team specialise in managing the affairs of US persons. We have a great deal of experience working with UK and other nationals moving to the US, and can help both before and after the move. Where necessary we work closely with other specialist professionals including Buzzacotts.
Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.