Assistance with adjusting portfolio for a US/UK citizen moving to the UK

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gweb
Posts: 3
Joined: Fri Oct 19, 2018 2:51 pm

Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by gweb » Fri Oct 19, 2018 4:54 pm

Hello fellow Bogleheads. I have been a long time lurker but am in need of some more active help. I hope you are able to assist because I have entered analytic paralysis.

Situation:
I am a dual US and UK citizen. I currently live in the US and have invested strictly through US vehicles. However, I have recently accepted a position that will require relocation to the UK for at least three years. It is an amazing opportunity but it comes with equally amazing complications with respect to taxes and investments. I have also recently closed down my last remaining actively managed account. The purpose of this posting is to identify how to effectively adjust my portfolio and seek advice from others that have encounter a similar situation.

As a note, I have been informed by CPAs that I will need to remain with a US broker for my investments to avoid PFIC. I will also need to invest in only UK reportable funds. Any non UK reportable fund will face a 45% tax on dividends and cap gains.

Emergency funds: six to 12 months of expenses
Debt: 350k 20 year on the house - 3.25% rate and doing double payments
Tax Filing Status: Married Filing Jointly
Tax Rate: 45% UK (~42% effective)
State of Residence: WA and London
Age: 32 and 34
Desired Asset allocation: 100% stocks / 0% bonds (outside the current 401k and IRA) (My wife and I both have gov pensions which should be 17k a year at retirement hence we are extra aggressive)
Desired International allocation: 30% of stocks

Current retirement assets

Taxable
46% SPDR S&P 500 ETF Trust (SPY) (0.0945%)
17% JPMorgan TR I Global Research Enhanced Index (JEIYX) (0.25%)
14% ISHARES MSCI EAFE ETC (EFA) (0.31%)
12% Primecap Odyssey FDS STK (POSKX) (0.67%)
.08% ISHARES TR CORE MSCI EAFE ETF (IEFA) (0.08%)
.04% FIDELITY 500 Index Fund Institutional Premium Class (FXAIX) (0.01%)

His 401k (Since separated from the gov)
70% TSP C
30% TSP I

His 401k (Current - Vanguard)
100% VANGUARD Institutional Target Retirement 2050 Fund (VTRLX) (0.09%)
%5 matching

Her 401k (Since separated from the gov)
70% TSP C
30% TSP I

Her 401k (Current - Fidelity)
100% BlackRock LifePath Index 2050 Institutional Shares (LIPIX) (0.16%)
%5 matching

Contributions
$18.5k his 401k (+5%)
$18.5k her 401k (+5%)
~$200k taxable (for retirement, not short term goals)
*In the UK this will switch to 10k GBP tax free and 13k GBP added to salary for him (max limit for earning)
*In the UK this will switch to ~35k GBP (individual and company contributions) for her

Available funds
122k cash available for investments in the taxable account
67k across the taxable investments listed above
~200k a year into taxable while living in the UK

Plan
1) Sell taxable shares and purchase 70% in Vanguard Total Stock Market and 30% Vanguard Total International Stock Market.
2) Increase allocations to investments in the taxable account due to limitations with my UK 401k (equivalent).
3) Avoid bonds in the taxable at all costs due to the UK reportable situation.

Questions
1) Does anyone have any experience with UK reportable funds? It looks like Vanguard ETFs are almost all reportable. Does anyone know if vanguard mutual funds are UK reportable? I have asked Vanguard but they have been attempting to answer this question for a few weeks.
2) Do I need caution with the UK 401ks? I know the IRS considers them equivalent and tax sheltered, but are they restricted in investment options due to PFIC?
3) Any funds worth keeping in the taxable account? I am strongly considering keeping POSKX and using FXAIX as a replacement for Vanguard Total Stock Market
4) Should I roll over my current vanguard 401k into the TSP? The current 401k no longer receive contributions after my UK relocation.
5) Is attempting tax harvesting worthwhile given my situation as a dual citizen living in the UK?
6) Any advice given the unique UK living as a dual citizen situation?
7) Any thing I am overlooking?

User avatar
Misenplace
Posts: 234
Joined: Mon Feb 01, 2016 9:46 pm

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by Misenplace » Fri Oct 19, 2018 8:46 pm

Although I know nothing about your situation, we are a dual citizenship family so I was curious about your issues. Have you done a search on the forum to see what types of issues and advice are out there? There have been several threads over the past couple of years. Here is one, there are many more:
viewtopic.php?t=203318

TedSwippet
Posts: 1867
Joined: Mon Jun 04, 2007 4:19 pm

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by TedSwippet » Sat Oct 20, 2018 4:31 am

gweb wrote:
Fri Oct 19, 2018 4:54 pm
1) Does anyone have any experience with UK reportable funds? It looks like Vanguard ETFs are almost all reportable. Does anyone know if vanguard mutual funds are UK reportable? I have asked Vanguard but they have been attempting to answer this question for a few weeks.
HMRC's publishes an up-to-date list of non-UK funds with UK reporting status. It's a bit fiddly to manage your way around, but comprehensive enough to be trusted once you do. You will need to search for funds on it by ISIN or similar, since the fund names are not consistently provided. If Vanguard's mutual funds are in this list then you will be okay if you hold them. Personally, I haven't looked for anything other than Vanguard ETFs here though, so don't know if it holds mutual funds as well.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
2) Do I need caution with the UK 401ks? I know the IRS considers them equivalent and tax sheltered, but are they restricted in investment options due to PFIC?
There are no US PFIC issues where non-US domiciled funds are held in treaty-protected pensions. The US/UK tax treaty recognises (most?) UK pensions as US tax deferred and (mostly) US tax-deductible. Watch out for limits on annual contributions. The treaty may protect only up to the maximum annual contribution under US laws, and this will probably be lower than the general UK allowance. Care needed here.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
3) Any funds worth keeping in the taxable account? I am strongly considering keeping POSKX and using FXAIX as a replacement for Vanguard Total Stock Market
Probably best to avoid holding anything in taxable accounts that is not HMRC reporting. No issues with HMRC 'reporting status' for holdings inside 401ks, IRAs, and similar, though.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
4) Should I roll over my current vanguard 401k into the TSP? The current 401k no longer receive contributions after my UK relocation.
No UK tax impact either way, as far as I can see.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
5) Is attempting tax harvesting worthwhile given my situation as a dual citizen living in the UK?
The UK has an annual £11.7k tax free capital gains allowance, but as a US citizen you won't benefit from that. What the UK does not take, the US will instead. As for capital losses, possibly some mileage if you carry them back to the US, but losses can be slightly hard to use up for UK tax purposes because you need to burn through that £11.7k tax free allowance before you get to use any of them up.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
6) Any advice given the unique UK living as a dual citizen situation?
Be aware that you will simply not be able to function in the same way as your non-US citizen colleagues, neighbours and friends. You get no benefit out of UK tax advantaged investments such as ISAs, NS&I tax free bonds, and so on. Gains on personal residence are tax free in the UK to any amount and over any period, but the US might tax you on those. And currency effects can be particularly pernicious -- it is possible to find yourself with a capital loss in £ terms that is nevertheless a US taxable capital gain when viewed in $ terms. Tax on phantom income there, then.
gweb wrote:
Fri Oct 19, 2018 4:54 pm
7) Any thing I am overlooking?
I would say state taxes here, but WA has none (yet?), so providing you are fully resident/domiciled in WA before you move, they at least should leave you alone while you live in the UK. Better than many states, then (VA is particularly problematic here).

Have you thought about social security taxes (US FICA, UK NI)? The US and UK have a 'totalisation agreement' that means, broadly, that what you pay in UK NI is US creditable for up to ten years. After that, you get to claim a proportion of the UK state pension when the time comes.

Other than these, search around for web articles covering US citizens living in the UK. There are plenty, and reading them all should give you a decent overview of the US tax issues and some assorted workrounds where possible.

typical.investor
Posts: 360
Joined: Mon Jun 11, 2018 3:17 am

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by typical.investor » Sat Oct 20, 2018 4:52 am

TedSwippet wrote:
Sat Oct 20, 2018 4:31 am
gweb wrote:
Fri Oct 19, 2018 4:54 pm
1) Does anyone have any experience with UK reportable funds? It looks like Vanguard ETFs are almost all reportable. Does anyone know if vanguard mutual funds are UK reportable? I have asked Vanguard but they have been attempting to answer this question for a few weeks.
HMRC's publishes an up-to-date list of non-UK funds with UK reporting status. It's a bit fiddly to manage your way around, but comprehensive enough to be trusted once you do. You will need to search for funds on it by ISIN or similar, since the fund names are not consistently provided. If Vanguard's mutual funds are in this list then you will be okay if you hold them. Personally, I haven't looked for anything other than Vanguard ETFs here though, so don't know if it holds mutual funds as well.
The Vanguard ETFs would likely be available at Schwab UK if your current broker doesn't let you stay on.
TedSwippet wrote:
Sat Oct 20, 2018 4:31 am
Have you thought about social security taxes (US FICA, UK NI)? The US and UK have a 'totalisation agreement' that means, broadly, that what you pay in UK NI is US creditable for up to ten years. After that, you get to claim a proportion of the UK state pension when the time comes.
What does "creditable" mean? I'm sure it depends on the country, but I thought the general 'totalisation agreement' means that credits in one country can be used to establish eligibility in another but you don't get actual dollar credit for amounts paid in.

For the SSA:
https://www.ssa.gov/international/Agree ... ts/uk.html
If you already have enough credits under the U.S. system to qualify for a benefit, the U.S. cannot count your U.K. credits.
When a U.S. benefit becomes payable as a result of counting both U.S. and U.K. Social Security credits, an initial benefit is determined based on your U.S. earnings as if your entire career had been completed under the U.S. system. This initial benefit is then reduced to reflect the fact that U.K. credits helped to make the benefit payable.
If you qualify for Social Security benefits from both the United States and the United Kingdom and did not need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced. This is a result of a provision in the U.S. law that can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security.

gweb
Posts: 3
Joined: Fri Oct 19, 2018 2:51 pm

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by gweb » Sun Oct 21, 2018 1:00 pm

This is great information and helped clarify a lot of what I was unsure of. Thank you all.

If you dont mind, I have three quick follow up questions:
1) Thanks for the help with the UK tax lookup tool. It does look like almost all of vanguard's ETFs are UK Reporting. I couldn't seem to find any of their mutual funds though. Not a big deal. Sadly it does look like Primecap is out and maybe FXIAX. Regarding FXIAX, Google is showing hints that FXIAX is UK reporting. However, I am unable to find it on the UK tax list. Any chance I am doing something wrong or is FXIAX out as well?
2) I am planning on using VTI (if FXIAX is out) and VXUS. However, is this a case where the vanguard tax efficient versions of these funds might be beneficial? What is your opinion on this Ted?
3) I am pretty sure I know the answer to this but I figured I would double check. My wife and I both have like insurance through our company and it will transfer to the UK. However, our individual term life, personal umbrella, and disability will not be valid while overseas. A fiduciary advisory has recommend that we look into indexed life insurance policies. The rational is that it will cover the gap in protection and save on tax. If I was staying in the US this seems to be a terrible investment option. Given the UK situation, does this actually become a worthwhile option?

TedSwippet
Posts: 1867
Joined: Mon Jun 04, 2007 4:19 pm

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by TedSwippet » Sun Oct 21, 2018 2:44 pm

gweb wrote:
Sun Oct 21, 2018 1:00 pm
1) Thanks for the help with the UK tax lookup tool. It does look like almost all of vanguard's ETFs are UK Reporting. I couldn't seem to find any of their mutual funds though. Not a big deal. Sadly it does look like Primecap is out and maybe FXIAX. Regarding FXIAX, Google is showing hints that FXIAX is UK reporting. However, I am unable to find it on the UK tax list. Any chance I am doing something wrong or is FXIAX out as well?
Doesn't look like it is reporting. Fidelity don't reveal the CUSIP for FXIAX, but looking through the entire section of HMRC's reporting funds list populated by Fidelity, it looked like only LU and IE ISINs appeared. These are Fidelity's EU domiciled funds targeted at (non-US person!) UK investors. I didn't notice any US domiciled funds in this part of the list.

I'm not altogether surprised. Vanguard's US domiciled ETFs are the only things that are well known to be listed. Without those, US citizens living in the UK would be screwed.

... and actually, some already are. As of the start of this year a new EU regulation, PRIIPS, has effectively prevented EU brokers offering or selling US domiciled ETFs to EU residents. As someone with a US brokerage account already, you will probably sidestep this, but for others life will be more painful. Another unpleasant result of the US's ridiculously overbearing regulatory regime is that US brokers have begun refusing service to US citizens who are not also US residents. That leaves these folk stranded -- unable to buy US domiciled funds at local brokers, and unable to use US brokers to circumvent that. Be sure to keep on good terms with your US broker for the duration of your stay outside the US, then.
gweb wrote:
Sun Oct 21, 2018 1:00 pm
2) I am planning on using VTI (if FXIAX is out) and VXUS. However, is this a case where the vanguard tax efficient versions of these funds might be beneficial? What is your opinion on this Ted?
I'm not aware of particular "tax efficient versions" of Vanguard ETFs, though I might be behind the curve here. Do you mean Vanguard's tax-managed mutual funds? If yes, are these UK reporting (I'd guess not)?
gweb wrote:
Sun Oct 21, 2018 1:00 pm
3) I am pretty sure I know the answer to this but I figured I would double check. My wife and I both have like insurance through our company and it will transfer to the UK. However, our individual term life, personal umbrella, and disability will not be valid while overseas. A fiduciary advisory has recommend that we look into indexed life insurance policies. The rational is that it will cover the gap in protection and save on tax. If I was staying in the US this seems to be a terrible investment option. Given the UK situation, does this actually become a worthwhile option?
Absolutely not my area. No idea. Sorry.

gweb
Posts: 3
Joined: Fri Oct 19, 2018 2:51 pm

Re: Assistance with adjusting portfolio for a US/UK citizen moving to the UK

Post by gweb » Mon Oct 22, 2018 8:35 pm

Thank you for verifying the Fidelity question. I was at a loss. But I think I am starting to get my head around that beast of an excel document. And yeah I was referring to the tax managed mutual funds. I wrongfully assumed that they all had ETF equivalents. Guess not. All that said, I starting the sales and should be purchasing the new vanguard ETFs shortly. Thank you all!

You are a rock star Ted. If you are in London, I owe you a pint. And seriously, please just PM me if you are.

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