The UK is one of the most popular European destinations for American expats. As an American expat in the UK, saving and investing your wealth wisely can be an unexpected challenge. That’s why UK-based clients of Creative Planning International have the complex interaction of U.S. and UK laws, regulations and taxes managed for them every day.
In this article, we highlight common investment management, financial planning and estate planning concerns Americans face while living in the UK. If you’re an American expat or an American considering moving to the UK, this guide is for you.
This article covers the following important issues that American expats living in the UK should understand when it comes to managing their wealth:
- The UK/U.S. Investment Conundrum
- Problems maintaining a U.S. brokerage account
- The benefit of the U.S./UK income tax treaty
- Understanding pension account differences
- Taxation: Arising basis vs. remittance basis
- Considerations for estate and inheritance tax planning
- Using trusts and wills
1. The UK/U.S. Investment Conundrum
The UK and the U.S. have modern, comprehensive income, estate and gift tax treaties. We’ll look at these treaties in more detail later. For now, you should know these treaties don’t alleviate a conflict between how capital gains from investments are treated by each country. Each country has very different rules about when a gain on an investment will be considered a capital gain and, therefore, become subject to capital gains tax (0%, 15% or 20% in the U.S. and 20% in the UK, where it’s known as CGT) or be taxed as regular/ordinary income at a marginal income tax rate. This investment conundrum is one investment trap to avoid for U.S. taxpayers living in the UK.
Passive Foreign Investment Companies (PFICs)
“U.S. persons” (U.S. citizens and U.S. lawful permanent residents, such as Green Card holders) are subject to citizenship-based taxation. Therefore, if you’re a U.S. person, no matter where you reside, you’re required to file U.S. federal income taxes annually — even if you can exclude your foreign-earned income — to stay compliant with U.S. tax laws and regulations.
The most significant tax laws and regulations, from a wealth management perspective, are those concerning passive foreign investment companies (PFICs). PFICs (e.g., non-U.S. mutual funds) are taxed very harshly under U.S. law. Tax rates and interest charges can sometimes eliminate any gain on the investment. PFICs also trigger annual tax filings that, according to IRS estimates, can take more than 20 hours per form to complete each year — and each PFIC requires a separate filing. Additionally, as PFIC gains aren’t considered capital gains, you can’t use losses from a PFIC (or other capital losses) to offset gains in PFICs you own.
For this reason, you’ll want to avoid buying UK and European funds (all are considered PFICs) and stick with buying U.S. funds that aren’t “foreign” and therefore can’t be PFICs. Read Americans Should Avoid Owning Shares in a Non-U.S. Mutual Fund for more details on PFICs.
Approved Offshore Reporting Funds
The UK has rules similar to U.S. PFIC regulations. In the UK, to obtain capital gains tax treatment from Her Majesty’s Revenue and Customs (HMRC), you must take care in choosing your investments. Capital gains in the UK are taxed differently from other income, such as your salary, and receive a £3,000 annual capital gains tax-free allowance (2024-2025). Only gains in excess of this amount are taxed (in most cases at a 20% CGT rate). This rate is often half your marginal income tax rate of 40%-45%.
On the other hand, U.S. ETFs will only obtain CGT treatment from HMRC if they qualify as approved offshore reporting funds. If your investments don’t qualify as approved offshore reporting funds, in addition to gains being taxed at your marginal income tax rate, losses in these “non-reporting” funds can’t be used to offset gains in other non-reporting funds.
The combination of these two conflicting taxation rules creates a critical investing trap U.S. taxpayers living in the UK must do their best to avoid.
You need an advisor who already knows about this issue and can create a portfolio that’s compliant with requirements in both jurisdictions.
Thankfully, for a U.S. or UK retirement account or pension that’s qualified by the U.S.-UK income tax treaty, this PFIC/approved offshore reporting fund conundrum isn’t an issue, as such accounts are considered opaque, and their contents aren’t of concern to the tax authorities. See more on treaty qualified accounts below.
2. Problems maintaining a U.S. brokerage account
Many U.S. firms have stopped providing services directly to retail clients who reside outside the U.S. and will even proactively close your account when they find out you live abroad. Read more on this topic here: Why U.S. Brokerage Accounts of American Expats Are Being Closed.
The UK law implementing an EU directive known as MiFID II (the UK enabling legislation remains in force post-Brexit) contains a clause that allows U.S. expats and others to buy U.S.-based investment funds as long as they work with an experienced non-EU registered investment advisor who purchases U.S. funds on their behalf.
Excerpt from MiFID II:
(111) The provision of this Directive regulating the provision of investment services or activities by third-country firms in the Union should not affect the possibility for persons established in the Union to receive investment services by a third country firm at their own exclusive initiative. Where a third-country firm provides services at the own exclusive initiative of a person established in the Union, the services should not be deemed as provided in the territory of the Union.
In short, a U.S.-based, SEC-regulated firm like Creative Planning that is willing to accept clients residing in the UK can provide services to you directly. This ability allows us to deliver services that are compliant in both the U.S. and the UK.
3. The benefit of the U.S./UK income tax treaty
The U.S. and UK are party to three separate treaties/agreements around income tax, estate and gift (inheritance) tax, and Social Security (State Pension in the UK) that are intended to help residents avoid double taxation and coordinate benefits. These treaties can be helpful in terms of determining first taxing authority and reducing double taxation.
However, properly interpreting these treaties and correctly applying their provisions requires training and experience. Treaties don’t eliminate all complications that can result in double taxation.
It’s important to note that the U.S./UK income tax treaty, like all U.S. income tax treaties, contains what’s known as a “saving clause.” By this clause, the United States in particular “saves” to itself the right to tax U.S. citizens and residents as if the treaty provisions had not come into force. There are a few important treaty provisions that are excluded from the saving clause.
One of the benefits of the treaty is the recognition of certain account types. U.S. retirement accounts (IRAs, Roth IRAs, 401k plans, etc.) are recognized as pension arrangements by the UK. Similarly, UK employer pension schemes and conforming UK self-invested personal pensions (SIPPs) are recognized as retirement accounts (but not U.S. retirement accounts) by the U.S.
This recognition essentially means the tax deferral available in each country is respected by the other country. These retirement accounts are called “opaque,” meaning any income or gain inside the account is ignored. Only distributions from the account are considered potentially taxable.
The treaty recognition of Roth accounts, if managed correctly, provides an opportunity to reduce future taxation through the judicious use of so-called “Roth conversions,” as distributions from Roth IRAs aren’t subject to tax in the UK. Read more on U.S. expat IRAs and Roth IRA conversions or watch our video on the four questions for U.S. expats investing in IRAs and Roth IRAs.
However, this account type recognition doesn’t extend to U.S. 529 plans (or other U.S. educational saving accounts) nor to UK individual savings accounts (ISAs). The tax deferral provided in one tax system isn’t provided in the other. This disconnect can lead to a worse outcome than holding assets in a regular taxable brokerage account.
4. Understanding pension account differences
There are important differences between the U.S. and UK retirement savings systems. There are different limitations placed on both the annual amount that can be contributed to pension schemes and the lifetime value allowed for “pension pots,” as they’re called in the UK.
You may be familiar with U.S. contribution limits such as $7,000 per year to an IRA ($8,000 if over age 50) or $23,500 for a 401k ($30,500 if over age 50). By contrast, in the UK, the annual allowance is £60,000. However, the more you earn, the less you can contribute. Starting at £260,000, your allowance is reduced by £1 for every £2 you earn. This reduction continues until your annual contribution allowance has been reduced to only £10,000.
5. Taxation: Arising basis vs. remittance basis (note: there are significant proposed changes)
The UK has a special regime that attracts people to make the UK their base. For those who qualify, it’s possible to be taxed only on UK-sourced income and earn income and gains outside of the UK free of UK tax until such funds are remitted to the UK. This is called the “remittance basis” of taxation.
Many things constitute a remittance. Here are some examples:
- Using a U.S. credit card to buy something in the UK is a remittance.
- Settling a debt for a service provided in the UK by paying for it outside the UK is a remittance (e.g., buying a ticket for a flight originating in the UK while in the U.S. using a U.S. bank account).
- Borrowing money abroad and repaying the loan using funds held abroad mightbe a remittance.
- Transferring money earned during the time period in which you were resident in the UK to the UK, even if you earned the funds for working outside the UK, is a remittance.
Remittance can seem like a great benefit. And it can be if your situation is similar to the following:
- You receive your income outside the UK and bring in only what you need to cover your UK expenses.
- You regularly work outside the UK (income from such days are only taxable if remitted).
- You have significant income from sources outside the UK, such as your investment portfolio.
- You don’t expect to stay in the UK long enough to ever need to bring those funds to the UK.
The other option is known as “arising basis” taxation. Under arising basis taxation, you pay UK income tax on your worldwide income and gains as they arise. Why might that be a better option than the remittance basis? To make the remittance basis work, you need to keep very detailed records of all income earned and not remitted so that you can calculate the tax liability on any income you remit. If you don’t keep such records contemporaneously, you’ll have to pay an accountant to determine the tax liability of any amount you remit in the future. This practice can become expensive.
More importantly, you’ll pay tax to the U.S. on the equivalent of an arising basis. If you’re on an arising basis in the UK, you’ll be able to offset the UK foreign taxes paid on that income with foreign tax credits. If you’re on a remittance basis, the tax you pay to the UK (when the income is remitted to the UK) may be years after you’ve paid U.S. taxes, possibly resulting in a mismatch and double taxation.
The UK announced that beginning in the UK tax year 2025-2026, there will be changes to the basis of taxation. Briefly, the UK will move to a residency-based model where non-UK income won’t be taxed for the first four years of residency. After four years, all worldwide income will be taxable by the UK. There are many aspects of this change that haven’t yet been addressed by the current UK government or UK opposition parties. We’ll revisit this topic as details become available.
6. Considerations for estate and inheritance tax planning
This is a very complicated topic from a cross-border perspective, so we’ll only touch on the significant differences encountered by an American in the UK. (Watch a short explainer video to learn how we define “cross-border” here.)
The U.S./ UK Estate and Gift Tax Convention (the treaty that covers U.S. estate and gift tax as well as UK inheritance tax) is a generous and comprehensive treaty. It leaves in place each country’s taxation rights with respect to its own nationals/citizens/domiciliaries but alleviates most of the “other” country’s taxation of those estates. What do I mean? If you’re a UK national (and not also a U.S. national) with investments in the U.S. (other than a business or real estate), you’ll only need to worry about UK inheritance tax (IHT). Similarly, if you’re a U.S. resident/citizen (and not also a UK domiciliary), you only have to worry about UK IHT for UK businesses and real estate.
That sounds great, but it really doesn’t help a U.S. citizen domiciled in the UK. That person (our typical UK resident client) is subject to all the rules for a UK domiciliary and all the rules applicable to a U.S. citizen.
U.S. citizens are subject to U.S. federal estate and gift tax rules on all their worldwide assets. However, in 2024, the first $13,610,000 is excluded from estate or gift tax.
The UK inheritance tax regime isn’t as generous. In the UK, inheritance tax is payable by estates worth more than £325,000 (2024-2025 tax year). There are many ways to improve the outcome for a UK domiciliary, but the important point is that if your estate has a tax liability, it will predominantly be a UK IHT liability.
There are strategies that can be implemented before you move to the UK to help, but most people don’t have the excess wealth needed to avail themselves of those strategies. We help our clients review their options before they move.
Gifts are treated differently in the UK, with the main difference being that if you survive your gift by seven years, it’s not included in your estate. By contrast, a gift above the current annual allowance ($18,000 for 2024) is reported on a gift tax return and, if no gift tax is paid, the amount of your U.S. lifetime exemption is permanently reduced. Again, it’s about finding ways to address your future UK IHT liability that will be of paramount concern, not your potential U.S. estate tax liability.
Learn more about inheriting from the U.S. while living abroad with a breakdown of many inheritance tax rules that apply to inheriting Americans living abroad.
7. Using trusts and wills
The UK is the origin of the trust concept. Trust professionals will tell you that during the times of the Crusades, when English lords went on military campaigns to the Middle East, they realized there was a significant risk that they might not return. Hence, this began the practice of establishing trusts, whereby their lands were held by someone else (a trustee). Trustees were required to maintain their estates and ultimately pass them to their heir in the event they did not return.
This trust concept existed for centuries before it was codified in both trust legislation and, most importantly, tax codes. In the U.S., it’s common for trusts to be established as part of an estate plan. Trusts can achieve many benefits, such as privacy, ease of administration, avoidance of probate proceedings, bringing forward estate tax realization through the application of gifting strategies (pay less gift tax now than estate tax in the future), sheltering assets from creditors, providing for special needs family members, and many others. Historically, the U.S. has been a very trust-friendly jurisdiction with extensive provisions that benefit trusts established in the U.S. tax code.
By contrast, the UK has evolved to become a somewhat unfriendly jurisdiction for what are known as substantive trusts that may be subject to periodic “charges to inheritance tax” (a need to pay a certain proportion of their assets as inheritance taxes even though no inheritance has actually been received). This rule and other complex anti-deferral rules have made the UK tax-unfriendly for trusts.
When you move permanently from the U.S. to the UK, you’ll need to seriously consider whether your U.S. estate plan still works in the UK. Most likely, you’ll need to revoke your U.S. will and potentially your U.S. living trust in favor of an English will that covers your worldwide assets. Watch a quick explainer video about a dual U.S./UK citizen that tackles this exact topic.
Conclusion
The UK is a great place to live and an exciting place from which to explore the world, but it has very complex investing, tax and estate planning rules for American expats that you’ll need to navigate with care. Request a meeting with a wealth manager from Creative Planning International to discuss how we can assist you in taking care of your wealth so that you can enjoy all the UK has to offer.
