There are a relatively large number of US expats living in the UK and Europe, many of whom will look to access the full range of investment options, savings vehicles and retirement plans available to them as part of their overall wealth and estate planning needs.
But they often encounter difficulties when formulating a financial plan, such as onerous reporting obligations, penal taxes and incomplete advice, writes Neil Williams, one of the founding partners of private investment firm LeifBridge.
Americans living overseas must pay particular attention to the complexities of dual taxation when it comes to cross-border planning and investing.
While these complexities warrant due consideration, they should not deter a US citizen, wherever they are resident, from putting in place a financial plan or investment strategy that takes into account their unique set of financial circumstances.
Additionally, there are many aspects related to financial planning which are beneficial and provide a means for more tax efficient investing.
While no financial planning should be considered a ‘one-size fits all’ exercise, there will inevitably be several common threads, including similar challenges encountered by US citizens living overseas.
Currency and domicile
Americans abroad will, inevitably, manage their lives on a multi-currency basis. At the simplest level they will need to open a bank account in the country in which they are living.
At the same time, they will always need to report their financial assets in US dollar terms to the Internal Revenue Service (IRS).
Fluctuations in exchange rates can have a dramatic impact on an investment portfolio where exchange rate risks exist across cash, fixed income and equity investments.
From a financial planning and investment strategy perspective, aligning a client’s portfolio base currency with their circumstances and financial objectives can have a positive impact on an individual’s financial situation.
Perhaps the most common oversight that occurs is when a US citizen living overseas invests capital into a non-US based mutual fund or pooled investment vehicle, without fully understanding the potential tax consequences involved.
Non-US based funds such as Oeics, unit trusts, investment trusts and ETFs, will typically fall under the definition of a passive foreign investment company (PFIC) for US tax purposes and, thus, any US taxpaying investor is likely to be subject to a punitive tax rate on any gains and income generated by the investment.
In addition, investing into a non-US mutual fund exposes the investor to annual PFIC reporting which can be a time consuming and costly exercise.
Pensions and savings
It is almost always beneficial for an individual to use tax-advantaged savings plans, such as personal pensions, as part of their overall financial planning.
But for Americans living overseas, choosing where to put their pension savings can get complicated.
In most cases, UK pension plans will qualify under the UK-US tax treaty and, as such, can provide a tax-efficient manner of building up savings for retirement for Americans living in the UK. Sipps can provide a wide range of investment options and, if the pension qualifies under UK-US treaty, the complexities with regards to PFICs will not apply.
Additionally, for higher and additional rate taxpayers utilising foreign tax credits (FTCs), these can provide significant benefits, particularly if the individual subsequently moves back to the US.
It is important to note that not all pensions, including UK and international pensions, will be treaty-eligible so if investors are in any doubt then this merits getting some additional advice.
For UK residents it is common to utilise an Isa as a tax-efficient savings account. Isas, however, aren’t recognised under the UK-US treaty and, therefore, don’t provide the same tax benefits for Americans living the UK.
Similarly, many insurance-based products, such as onshore and offshore bonds, issued by non-US insurance providers, will meet the requirements of local tax regimes but may not qualify under US tax codes.
Americans investing capital into a non-US qualifying insurance product will bring with it complex reporting obligations and penal US taxes, eradicating the potential benefits of investing into such products.
There are offshore insurance products which are US-qualifying and with proper planning these can provide extremely flexible and efficient solutions.
Estate planning
No financial plan would be complete without due consideration given to one’s estate. Trusts are often used as part of an overall wealth and estate plan.
However, foreign (non-US) trusts will have complex legal and tax considerations and trustees, settlors and beneficiaries need to be aware of ongoing tax and reporting obligations.
For Americans who are philanthropic, utilising a dual-qualified donor advised fund (DAF) for their charitable donations can be beneficial, as any donations can receive both a US and a UK tax deduction with the option to nominate where the funds will be donated at a future date.
With concerns around increasing inflation, political risks, rising interest rates and a possible recession around the corner, there has never been a greater need to protect and enhance one’s wealth.
For US citizens living overseas, finding a wealth manager who has the knowledge and experience to help them navigate through both the cross-border challenges and the increasingly complex investment environment will prove to be a beneficial partnership over time.
This article was written for International Adviser by Neil Williams, one of the founding partners of private investment firm LeifBridge
