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The Problem With 529 Plans for American Expats Living in the UK

Roger Healy, CFP®, MBA

Director of Financial Education

Last Updated
August 19, 2022
Family crossing the road in London

3 Things to Know Before You Invest in a College Savings Plan

Like many Americans, U.S. citizens living abroad can benefit from investing in tax-advantaged accounts, like 529 plans. However, for American expats living in the UK, investing in an American 529 plan does not give you any tax benefits. In fact, it will likely cause an additional tax burden. So, if you’re planning to be an American living in the UK, you should make sure you understand the tax implications of any 529 plans you have set up in the U.S. before you move.

529 Plans and Dry Taxes

In the UK, 529 plans are viewed as a trust . The assets in the trust are available to the settlor of the trust, who has various powers including the power to take the funds out of the plan and use them to pay for expenses. These expenses could include, but are not limited to, their own qualified education expenses, and, as a result, the income and gains are taxable to a UK settlor even if they don’t have a distribution from the trust with which to pay the tax. In the UK this is sometimes called a dry tax, as there is no accompanying liquidity event, such as a distribution from a trust. And it gets worse.

Qualified Expenses Don’t Matter in the UK

A UK resident for whom a 529 plan pays an expense is likely to be taxed on the income and gains in such a distribution. Whether the distribution pays for a UK university qualified under FAFSA, the Free Application for Federal Student Aid form, tuition at a private UK primary or secondary school, or a U.S. institution, it doesn’t matter to the UK; the UK doesn’t care whether the IRS determines the expense to be a qualified expense. So long as the person receiving the benefit (the student) is a UK resident, the income and gains apportioned to the distribution from the 529 plan may be taxable to the student (and this is true even when the settlor is not a UK resident).

UK Non-Residency Not Likely

Another factor to consider is residency. As an American living in the UK, setting up a 529 plan may seem like a viable option if you think your children are set on attending college in the U.S. However, going away for college is not normally considered a factor when determining residency. As in the U.S., a student away at college remains a resident in their home state rather than in the state where they attend university. The same is true for a UK resident attending college in the U.S.

Of course, it’s possible for a UK student to move permanently to the U.S. and become a non-resident from a UK perspective. However, if they return to the UK within five years, they will be considered to have never been non-resident and will be liable for all the taxes they thought they had avoided.

Another problem is the lack of approved offshore reporting funds in which to invest. This means the income distributed to the child to pay their expenses will be taxable as ordinary income even if it’s capital gains or dividend income.

College Savings for Americans in the UK – What Now?

As outlined above, it’s unlikely for American expats living in the UK to benefit from investing in an American 529 plan. So how should American parents in the UK effectively save for their children’s education?

Rest assured, there are ways for American expats to maximize their investment returns and avoid common investment mistakes. At Creative Planning International, we’re experienced in helping expats integrate effective education funding strategies in their overall financial plan.

We build comprehensive wealth management and financial planning solutions that will help you navigate your unique situation as an American living abroad, especially when it comes to U.S. expat taxes and investments.

If you’re an American expat in the UK trying to save for college, request a meeting with a member of our knowledgeable and experienced team!

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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