Whilst it may seem financially attractive for US citizens living in the UK to take advantage of UK based investments, there is often an unwelcome sting in the tail.
US citizens are required to file an annual Tax Return with the Internal Revenue Service (IRS) reporting worldwide income and losses. However, the reporting currency is the US dollar and for those living outside the US, exchange rate fluctuations may lead to US taxation on income that is not replicated in the host country currency.
For example, if you are trading stock in UK sterling, or are selling a home in the UK with a sterling-based mortgage secured against it, when you sell you must report the acquisition and sales price in dollars, based on the exchange rate for both days. This can lead to the creation of a dollar gain that exceeds the gain in sterling. In addition, the redemption of the mortgage may also create a dollar gain on its settlement.
And, certain UK tax efficient investments not taxed in the UK, will be taxed in the US in the year earned, reducing the value of the product, with the IRS requiring US taxpayers to report where their non-US assets are sited, meaning onerous reporting procedures.
An example of this is the common stocks and shares ISA. The IRS see each individual fund in an ‘ISA wrapper account’ as being a standalone foreign entity, known as a Passive Foreign Investment Corporation. These must be reported annually, along with any activity within the fund. Therefore, the tax advantage and value of the investment, once complex tax forms are completed by your Tax Advisor, and the 39.6% taxation on annual tax generated by the investment is deducted, can quickly negate any advantages.
Conversely an investment into a UK Personal Pension Plan or SIPP can be US tax efficient, providing the annual reporting is completed correctly to avoid the IRS seeking to tax any growth in the accumulated funds.
So, always be aware that UK tax free investments may not perform efficiently given the IRS treatment of such vehicles, and finally, remember the influence of exchange rates will not always work in your favour.
If you would like any further information please call us on 01932 320800, email email@example.com , or visit our website www.everfairtax.co.uk