UK / HK / US person seeking advice

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Topic Author
StoneFeeler
Posts: 52
Joined: Wed Feb 20, 2019 3:23 am

UK / HK / US person seeking advice

Post by StoneFeeler »

[Moved into a separate thread from: US/UK Citizen Seeking Tax advice --admin LadyGeek]

I need advice for my daughter. This thread seems very relevant to her upcoming situation, so asking my questions here.

Her situation is:
- Hong Kong passport
- Working in the UK since Oct 2019
- About to become US Green Card holder in 2021
- But plans to continue to live and work in the UK for a few more years (with the objective of getting a UK citizenship before moving to the US).

Investment situation:
- She has an ISA account with Vanguard, UK, in which she has invested her savings in Ireland-domiciled ETFs. She continues to contribute monthly into this. She has some capital gains so far, thanks to the crazy run-up in the stock market in 2020.

Questions:

1. Once she becomes US Green Card holder, it looks like she has to choose the US-domiciled funds that do not fall foul of UK 'non-reporting fund' tax issues, as advised here. But the problem for her will be that she does not have a US broking account. What can she do?
2. Does she have to sell her existing ISA holdings and reinvest in the "correct" funds?

Thanks!
"Crossing the steam by feeling the stones"
TedSwippet
Posts: 3684
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: US/UK Citizen Seeking Tax advice

Post by TedSwippet »

StoneFeeler wrote: Wed Jan 20, 2021 10:52 pm - About to become US Green Card holder in 2021
- But plans to continue to live and work in the UK for a few more years (with the objective of getting a UK citizenship before moving to the US).
These two could be mutually incompatible. A green card effectively becomes invalid (for immigration purposes, though not for tax purposes; the US likes to have things both ways) if you don't actually live in the US. You can sometimes have a year of non-residency, or up to two with a 'reentry permit'.

How do I get a reentry permit?
A lawful permanent resident (LPR) normally may travel outside the United States and return; however, there are some limitations. A reentry permit can help prevent two types of problems:
- Your Permanent Resident Card becomes technically invalid for reentry into the United States if you are absent from the United States for 1 year or more.
- Your U.S. permanent residence may be considered as abandoned for absences shorter than 1 year if you take up residence in another country.

A reentry permit establishes that you did not intend to abandon status, and it allows you to apply for admission to the United States after traveling abroad for up to 2 years without having to obtain a returning resident visa. Reentry permits are normally valid for 2 years from the date of issuance.
Given these, I'm not sure how feasible it is to obtain a green card but live and work in the UK for "a few more years". The obvious next question is, can she use repeated reentry permits? As far as I can tell, there is no regulation that limits this. However, with each application, perhaps even the first, she will be relying on the judgement of the processing officer, and absence from the US as a green card holder is very much suppose to be temporary and after a period of actual residency.

My personal guess is that this would be a brittle situation even with a period of preceding US residency. Without any US residency at all, where she obtains the green card in the UK rather as a US resident on an L or H visa, arguing temporary absence over a period of "a few more years" seems to me like a very steep cliff to climb.
StoneFeeler wrote: Wed Jan 20, 2021 10:52 pm 1. Once she becomes US Green Card holder, it looks like she has to choose the US-domiciled funds that do not fall foul of UK 'non-reporting fund' tax issues, as advised here. But the problem for her will be that she does not have a US broking account. What can she do?
2. Does she have to sell her existing ISA holdings and reinvest in the "correct" funds?
Technically, the date you become a US person for tax purposes is the first day of US residency following receipt of the green card. Many people who get green cards will already be US residents anyway, under H or L visas, but for those who receive them while outside the US, and who don't pass the substantial presence test, US tax hassles do not begin until they have entered the US.

Residency Starting and Ending Dates | Internal Revenue Service
If you meet the green card test at any time during a calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident (the date on which the United States Citizenship and Immigration Services (USCIS) officially approved your petition to become an immigrant).

If you receive your green card abroad, then the residency starting date is your first day of physical presence in the United States after you receive your green card.
Once she is about to become a US taxable person though, then yes. She will want to sell any non-US domiciled funds and ETFs she holds before entering the US tax system. It may be hard to replace them with US domiciled things until after moving to the US, when she can open a US brokerage account, so likely an unavoidable period in cash there. This applies to both unwrapped trading accounts and UK ISAs.

Specifically on ISAs, it will likely be impossible for her to access US domiciled funds in an ISA, thanks to PRIIPs. The only realistic options would be individual shares, or to simply cash in the entire ISA. Doing the latter takes away future UK tax shelter space, but if there are no plans to return to the UK then this is no loss; the US does not recognise ISAs as any form of tax shelter.

Also, maybe sell up any other stuff with a built-in capital gain before entering the US tax system. That might include her main home, since unlike the US, the US does not fully exempt your primary residence's capital gains from tax. Anything with a built-in loss might be kept and then sold after entering the US tax system, for a useful US tax loss. UK pensions should be okay under the US/UK tax treaty, so they can probably be left alone.

This wiki page contains more complete details:

US tax pitfalls for a non-US person moving to the US - Bogleheads
Topic Author
StoneFeeler
Posts: 52
Joined: Wed Feb 20, 2019 3:23 am

Re: US/UK Citizen Seeking Tax advice

Post by StoneFeeler »

@TedSwippet,

To clarify: She will get a US immigration visa and will become a Green Card holder the day she enters the US. The plan then is to get re-entry permits twice for a total of four years (which is possible, according to legal advice) and stay/work in the UK during that time.

Then the following questions arise:

How can she open a US brokerage account without an address there?
Can she buy the "shortlisted funds" (i.e. US-domiciled funds that do not fall foul of UK 'non-reporting fund' tax issues) with a UK broking account?
Where could she invest her savings for the next four years, until she actually moves to the US?

Thank you
"Crossing the steam by feeling the stones"
glorat
Posts: 892
Joined: Thu Apr 18, 2019 2:17 am

Re: UK / HK / US person seeking advice

Post by glorat »

StoneFeeler wrote: Wed Jan 20, 2021 10:52 pm Her situation is:
- Hong Kong passport
Does that mean she is a HK permanent resident? If so, that likely qualifies her to open an IBKR brokerage account set in Hong Kong.

Note that doesn't absolve you of your tax responsibilities in the country where you are tax resident (UK residents are globally taxed) but it does open up options. For example, I wonder what happens if you invest in accumulating ETFs (so no dividends) and at the time you become no longer UK tax resident, it is possible the UK tax man no longer cares. But then I have no idea what happens once you work in US... don't know if someone will shout PFIC at you.

Also, if you yourself are both tax resident and domiciled in Hong Kong, that opens up other options.
TedSwippet
Posts: 3684
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: US/UK Citizen Seeking Tax advice

Post by TedSwippet »

StoneFeeler wrote: Thu Jan 21, 2021 6:47 am To clarify: She will get a US immigration visa and will become a Green Card holder the day she enters the US. The plan then is to get re-entry permits twice for a total of four years (which is possible, according to legal advice) and stay/work in the UK during that time.
That's the apparent meaning of the IRS instructions. Note that 'US taxable person' status kicks in on the first day of presence in the US following green card receipt. This would seem to include any presence, for example a vacation or visiting family.

Also, you have to be physically in the US to apply for a reentry permit. That significantly limits any period during which your daughter could have green card status but without becoming a 'US taxable person'.
StoneFeeler wrote: Thu Jan 21, 2021 6:47 am How can she open a US brokerage account without an address there?
Probably tricky. Most US brokers don't want to touch even US citizens living outside the US, so a green card holder who hasn't ever lived in the US is probably well outside their onboarding processes. All you can do is to ask around (and be prepared for rejection). Interactive Brokers springs to mind as a broker who might accept your daughter, but see below.
StoneFeeler wrote: Thu Jan 21, 2021 6:47 am Can she buy the "shortlisted funds" (i.e. US-domiciled funds that do not fall foul of UK 'non-reporting fund' tax issues) with a UK broking account?
Unlikely in a UK account. UK brokers cannot offer US domiciled funds or ETFs, because of PRIIPs. Moreover, many UK brokers will forcibly close accounts of anyone who becomes a US taxable person. For example:

https://www.youinvest.co.uk/sites/defau ... itions.pdf
11.2 You must inform Us immediately if you become a USA citizen, a USA resident for tax purposes, a Canadian citizen or a Canadian resident for tax
purposes. We may close Your ISA and Lifetime ISA if You inform Us that You have become a USA citizen, a USA resident for tax purposes, a Canadian citizen or a Canadian resident for tax purposes and We may close a Junior ISA for a Child, if You inform Us that the Child has become a USA citizen, a USA resident for tax purposes, a Canadian citizen or a Canadian resident for tax purposes.
...
12.3 We cannot open a Dealing Account for You, if You are, and We may close Your account if You become, a USA citizen, a USA resident for tax purposes, a Canadian citizen or a Canadian resident for tax purposes. You must inform Us immediately if You become a USA citizen, a USA resident for tax purposes, a Canadian citizen or a Canadian resident for tax purposes.
{Side note: The reason for steering clear of US persons is clear: US extraterritorial taxation, enforced by FATCA. I am at a complete loss to explain the reason for excluding Canadians, though. Many other UK brokers reject US persons, but as far as I know, this is the only one that also rejects Canadians.}

A pure US-only broker won't have to follow EU and UK PRIIPs regulations. However, as noted above, opening an account with a pure US-only broker will be difficult for a non-US resident. And the expat's usual refuge, Interactive Brokers, is reported to be applying PRIIPs to EU and UK residents.
StoneFeeler wrote: Thu Jan 21, 2021 6:47 am Where could she invest her savings for the next four years, until she actually moves to the US?
Once caught by overlapping (but conflicting) US and UK tax laws, the only good option from a tax perspective is US domiciled and UK reporting status ETFs, and this will be tricky to impossible, for reasons outlined above. Beyond that, passively managed individual stocks.

No other options suggest themselves. And once entangled, the full panoply of US tax traps will apply to every financial move she makes.
Topic Author
StoneFeeler
Posts: 52
Joined: Wed Feb 20, 2019 3:23 am

Re: UK / HK / US person seeking advice

Post by StoneFeeler »

glorat wrote: Thu Jan 21, 2021 8:03 am
StoneFeeler wrote: Wed Jan 20, 2021 10:52 pm Her situation is:
- Hong Kong passport
Does that mean she is a HK permanent resident? If so, that likely qualifies her to open an IBKR brokerage account set in Hong Kong.
She has a passport (and PR) in HK, but lives and works in the UK. She could try IBKR-HK, but we have to see if they will accept a UK resident.
"Crossing the steam by feeling the stones"
Topic Author
StoneFeeler
Posts: 52
Joined: Wed Feb 20, 2019 3:23 am

Re: UK / HK / US person seeking advice

Post by StoneFeeler »

@TedSwippet,

1. She will enter the US and become a Green Card holder. Then travel there every six months for a year or so, until this whole Covid craziness settles down. Then apply for re-entry permit.

2. What is clear is that she needs to sell her ISA investments before she gains the US Green Card. I will advise her to do so.

3. Later, we will knock on different UK/US/HK brokerages (including IBKR) to see who will accept her account. And once somone accepts her account, we will see if she can invest in US-domiciled funds that do not fall foul of UK 'non-reporting fund' tax issues.

Thank you for your time and patience to provide detailed responses. Much appreciated.
"Crossing the steam by feeling the stones"
Topic Author
StoneFeeler
Posts: 52
Joined: Wed Feb 20, 2019 3:23 am

Re: UK / HK / US person seeking advice

Post by StoneFeeler »

I have been doing some more reading and research on this, and have arrived at the following options:

OPTION 1 (not feasible)

a) Move the ISA from Vanguard to Hargreaves and Landsdown (the only one willing to accept US citizens and residents) - charge 45bp per year
b) But HL does not seem offer US-domiciled/HMRC-reporting ETFs, making this option infeasible.

OPTION 2

a) Open an account with Interactive Brokers, Hong Kong
b) Invest in US-domiciled/HMRC-reporting ETFs: I have shortlisted VOO, VEU and BSV. I might shortlist a couple more from the eligible list.
c) If there are dividend distributions, I will need to report them on the US and UK tax returns
d) As long as I don't sell the ETFs, I won't have capital gains taxable in the UK. If I sell them after I exit the UK, I won't ever have to pay capital gains tax in the UK.
e) Capital gains will be taxed in the US as usual - like any other cap gains.
f) These ETFs are available only in USD, which means I have to convert my savings to USD.

Could you please critique my thoughts, assumptions and conclusions? Is there any flaw in this plan? I am particularly worried about 2(c) and 2(d).

Thank you!
"Crossing the steam by feeling the stones"
TedSwippet
Posts: 3684
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UK / HK / US person seeking advice

Post by TedSwippet »

StoneFeeler wrote: Sun May 16, 2021 1:06 am OPTION 1

a) Move the ISA from Vanguard to Hargreaves and Landsdown (the only one willing to accept US citizens and residents) - charge 45bp per year
b) But HL does not seem offer US-domiciled/HMRC-reporting ETFs, making this option infeasible.
Right. Okay for individual shares, but infeasible for ETFs or funds, due to restrictions already discussed (the intersection of PFIC and PRIIPs, compounded by FATCA).

The only bit that is incorrect is that the 45bp charge is for mutual funds only; they are much cheaper than this for ETFs. Of course, that is no help when this option does not offer US domiciled ETFs.
StoneFeeler wrote: Sun May 16, 2021 1:06 am OPTION 2

a) Open an account with Interactive Brokers, Hong Kong
If still in the UK, opening an account with the specific HK branch of Interactive Brokers might prove tricky. Not an IB customer, but my belief is that they assign you to an office based on your residence location when you open the account, rather than you getting to choose it.
StoneFeeler wrote: Sun May 16, 2021 1:06 am b) Invest in US-domiciled/HMRC-reporting ETFs: I have shortlisted VOO, VEU and BSV. I might shortlist a couple more from the eligible list.
If the account holder is still resident in the UK, I suspect that PRIIPs will make these US domiciled ETFs unavailable. That is, IB will only base an account for a UK resident in one of its offices that deals with the UK in general, and under PRIIPs, UK and EU brokers cannot offer ETFs that do not comply with PRIIPs, which so far no US domiciled ETF has done. Anecdotally, IB applies PRIIPs regulations:

Interactive brokers screws EU customers - Bogleheads.org
American in the EU -- problems with IB acct - Bogleheads.org
UK resident, US and U.K. taxpayer, ETF investing - Bogleheads.org

I suspect then that a combination of the two above may make the option infeasible also. In effect, you need a temporary way around PRIIPs, and these are few and far between. This thread suggests one possible broker that might allow EU and UK residents to trade US domiciled ETFs, but it is unclear how safe and future proof this might turn out to be:

Is Tastyworks a good broker? Or other US brokers for Europeans? - Bogleheads.org

The other route that comes up is to use options to bypass PRIIPs. Far from simple:

European, dutch investor here: Is investing in VTI and VXUS still a good choice? - Bogleheads.org
StoneFeeler wrote: Sun May 16, 2021 1:06 am c) If there are dividend distributions, I will need to report them on the US and UK tax returns
d) As long as I don't sell the ETFs, I won't have capital gains taxable in the UK. If I sell them after I exit the UK, I won't ever have to pay capital gains tax in the UK.
Right on both, if you can get this far. The UK does not have an 'exit tax', and US domiciled ETFs that hold UK 'reporting status' do not run into the UK's much less brutal PFIC equivalent tax rules. Remember also that the UK has an annual capital gains tax free allowance of just above £12k, completely separate from other income tax allowances, so even if still resident in the UK on sale, it is possible for there to be no UK capital gains tax liability. Also, UK ISAs are entirely UK tax-free (though they are not US tax-free).
StoneFeeler wrote: Sun May 16, 2021 1:06 am e) Capital gains will be taxed in the US as usual - like any other cap gains.
f) These ETFs are available only in USD, which means I have to convert my savings to USD.
Right.

The bottom line, as ever, is that the US's uniquely extraterritorial tax regime, its ugly and savage PFIC rules, and restrictive EU PRIIPs together make it borderline impossible for US citizens and green card holders living in the EU and the UK to invest efficiently.
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