US funds with HMRC reporting/distributing status

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Topic Author
dualcitizenusuk
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Joined: Sat Nov 23, 2013 9:14 am

US funds with HMRC reporting/distributing status

Post by dualcitizenusuk »

I am a US citizen in the UK and recently became aware of the problems of investing. This is my current understanding.
  • A US citizen cannot hold non-US mutual funds since they are treated as PFIC with onorous filing requirements.
  • Using a UK Stocks and Shares ISA (tax free wrapper) maybe OK for individual stocks (but may still trigger PFIC). But no funds - an ISA cannot hold non-UK mutual funds (and since it is invisible to the IRS holding any UK funds would trigger PFIC requirements)
  • I cannot contribute to a Roth IRA since I am married filing separately (wife is NRA) and earn more than $10,000.
  • A UK tax payer is taxed punitively on foreign funds that are not listed with "distributor status" or I think reporting status here: http://www.hmrc.gov.uk/cisc/offshore-funds.htm
Given that I do not want to maintain a portfolio of individual stocks, but want to use passive funds, what options are open to me?

I accept that I will have to forgo any tax-advantaged accounts. I have a regular Interactive Brokers account and I guess the best thing I can do is hold US mutual funds in there. I would like to use passive Vanguard type funds, but I need to find ones that are US based, but with distributor or reporting status in the UK. I wondered if anyone here might be in a similar situation or be able to help with a list of funds that satisfy these requirements. I am sure such a list would be useful to many people who are in a similar situation and would just like to make a safe choice of fund rather than setting up more complicated financial instruments. I would start to check but it is a little daunting knowing where to start. There are thousands of funds in the HMRC list but I'm sure only a small number of them have a chance of being low cost passive funds and US based. As far as I can tell the Vanguard funds listed in the HRMC list are from the "international" arm of Vanguard (Vanguard PLc) and so are probably not US domiciled funds. Are there other companies with a range of passive funds that would be worth looking at?

I'm hoping someone with more knowledge can shed some light.
TedSwippet
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Location: UK

Re: US funds with HMRC reporting/distributing status

Post by TedSwippet »

The HMRC list of reporting funds contains a decent selection of Vanguard US ETFs that you could hold without PFIC issues. It takes a bit of work to match up CUSIP numbers, but they are there. For example, Vanguard US's VTI has CUSIP 922908769, and is listed as "reporting" for UK tax purposes (currently row 26498 in HMRC's spreadsheet).

You are right though that you cannot participate in ISAs and the like. Your US citizenship unfortunately relegates you to second-class participation when it comes to UK investment vehicles and tax advantaged schemes.
Topic Author
dualcitizenusuk
Posts: 4
Joined: Sat Nov 23, 2013 9:14 am

Re: US funds with HMRC reporting/distributing status

Post by dualcitizenusuk »

TedSwippet wrote:The HMRC list of reporting funds contains a decent selection of Vanguard US ETFs that you could hold without PFIC issues. It takes a bit of work to match up CUSIP numbers, but they are there. For example, Vanguard US's VTI has CUSIP 922908769, and is listed as "reporting" for UK tax purposes (currently row 26498 in HMRC's spreadsheet).
Thanks very much - I think that example gets me started.

Is it safe to assume that if a fund has a CUSIP number (listed in the HRMC list) then it is US based? (So I could just filter the list by the presence of that column)
TedSwippet
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Location: UK

Re: US funds with HMRC reporting/distributing status

Post by TedSwippet »

dualcitizenusuk wrote:... Is it safe to assume that if a fund has a CUSIP number (listed in the HRMC list) then it is US based? (So I could just filter the list by the presence of that column)
Not fully safe but perhaps a useful first approximation. CUSIP is shared across both the US and Canada, and you won't want to accidentally buy a Canadian domiciled fund.

One additional note: you may(*) be able to find an ISA that will let you buy 'foreign' stock, and that would include VTI and other Vanguard US ETFs, so an ISA is not necessarily off the table. HMRC 'distributor status' is also irrelevant for ISA and SIPP holdings. You may not get any tax advantage from an ISA now, because the US could simply take what the UK relieves in tax. But... it allows you to capture your annual allowance, and that might come in useful if in future you decide to decouple from the US by renouncing your US citizenship -- from that point on your ISA would be fully tax free.

(*) Your challenge here is that thanks to FATCA and a recent raft of overbearing and poorly conceived US regulation many UK ISA providers now refuse accounts for any "US persons", even those who are also UK or other dual citizens and/or fully resident in the UK.
Topic Author
dualcitizenusuk
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Joined: Sat Nov 23, 2013 9:14 am

Re: US funds with HMRC reporting/distributing status

Post by dualcitizenusuk »

Thanks again, thats really useful.

I had looked into the possibility of US funds inside an ISA but from pages like this while it might be possible to get other EEA funds in an ISA I think getting US domiciled funds looked really tricky.

It seems the best investment option for a US citizen in the UK is a Roth IRA since that is fully respected in the UK, so the only downside is currency conversion to pay in (and currency risk depending on the holdings). But since I am married filing separately I cannot use a Roth IRA (my wife understandably wants nothing to do with the US tax system). But I read today in this forum about the backdoor Roth - would this be a way for someone in my position to get some tax free savings? I have no other US accounts (no existing traditional IRA) so it seems like it would work fine, if I could find an IRA providor that would accept a UK resident.
TedSwippet
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Re: US funds with HMRC reporting/distributing status

Post by TedSwippet »

dualcitizenusuk wrote:... I had looked into the possibility of US funds inside an ISA but from pages like this while it might be possible to get other EEA funds in an ISA I think getting US domiciled funds looked really tricky.
Ah, that's an unwanted fly in the ointment. Last I looked was from the perspective of a SIPP, and I'd assumed (wrongly, by the look of things) that what applied to SIPPs also applied to ISAs. Sigh. That may well close them off completely unless you're prepared to invest directly in shares.

The Roth IRA is definitely a good option for a US person in the UK, if you can open one. Several stateside IRA providers are reported to close or refuse accounts for non-US residents, again in response to poor US policy and regulation. You should however take the list of nonresidents-unwelcome institutions in the above linked article with a pinch of salt; Vanguard has not (yet) forcibly closed my IRA/401k (thank you, Vanguard!) and it is five years since I left the US.

If your wife is not a US citizen you also need to pay close and special attention to US estate taxes. There is no unlimited marital exemption for non-citizen spouses, meaning that in the worst case your wife could have to sell her UK home to pay a US estate tax bill. Also no unlimited gift tax exemption, so beware of 'gifts' to your wife, even unintentional ones like splitting the house ownership. For 2014 the exemption for non-citizen spouses caps at around $140k. On the plus side, if you can funnel cash to your wife without tangling with US gift tax she can then do 'your' investing without any of the hassle or restriction that your US citizenship brings you.

Overall it is a world of financial hurt these days for ordinary US citizens trying to lead a normal life outside of the US. Renunciation numbers are up significantly compared with previous years, and look set to rise further once FATCA truly sets in.
Topic Author
dualcitizenusuk
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Joined: Sat Nov 23, 2013 9:14 am

Re: US funds with HMRC reporting/distributing status

Post by dualcitizenusuk »

TedSwippet wrote:That may well close them off completely unless you're prepared to invest directly in shares.
Yes, I think I don't have time or interest to properly maintain a portfolio of individual shares, and in any case the trading fees on these sorts of accounts in the UK (usually £15-20 per trade I think) rule out investing with IRA contribution type sums (ie $5000 in 10 stocks mean I have to make 10% gain to cover the fees of buying and selling).
TedSwippet wrote: The Roth IRA is definitely a good option for a US person in the UK, if you can open one.
I will look into it. I do have a parents address in the US I could have correspondance addressed to. Are providers like Vanguard particularly concerned with you being fully resident there or is a US address for the form sufficient?

Also I am a little worried about the "backdoor Roth" but there is no way my wife wants to file and it does not seem to be in the spirit of the provision for someone in my situation to be excluded (ie my personal income and our joint incomes are well within the range if I was not married filing separately, its just my wife who has no connection to the US does not want to start filing in the US). I guess if one does the traditional - Roth transfer in a different year from the traditional contribution then there can be no argument about step transactions since the money is ending up contributed in a different year.

I have found the complexity of coming into compliance daunting, but I think now I am it should not be too difficult in the future - provided I stay away from normal non-US mutual fund investments. I am early in my career and I definitely want to keep my US citizenship for the professional opportunities it may open in the future.
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Epsilon Delta
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Re: US funds with HMRC reporting/distributing status

Post by Epsilon Delta »

dualcitizenusuk wrote: Yes, I think I don't have time or interest to properly maintain a portfolio of individual shares, and in any case the trading fees on these sorts of accounts in the UK (usually £15-20 per trade I think) rule out investing with IRA contribution type sums (ie $5000 in 10 stocks mean I have to make 10% gain to cover the fees of buying and selling).
People get carried away with diversification. Diversifications a good thing, but the absolute risk of owning $5000 of a single stock is not the same as the absolute risk of owning $50,000 of a single stock. If you own other stocks outside the IRA then you also have some diversification. If you can only invest $5,000 per year just buy a different stock every year and after 10 years you'll have a decent amount of diversification. Sure it's not perfect, but it's not awful.
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