US investor moving to UK; practical options

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DouroBound
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US investor moving to UK; practical options

Post by DouroBound » Wed Jul 10, 2019 11:21 am

I've read through numerous posts on the ever-worsening conundrum facing US investors in Europe (and specifically the UK). I've learned a lot in particular from Ted Swippet's knowledgable posts (thanks!). My wife (US/UK citizen) and I (US citizen) are very likely making a long-planned, oft-delayed move to the UK at the end of the year and I'm trying to get my house in order and set things up in a way that allows me to reach retirement in about 10 years.

Quick summary of the problem (as I understand it): (1) as UK residents, we cannot invest in funds that are not HMRC Reporting; (2) as EU residents, PRIIP rules prevent us from buying new shares in funds unless they issue a KID, and no US-funds do this or have plans to do this; (3) as US citizens, PFIC rules effectively bar us from holding any non-US mutual funds of ETFs.

So, (1) forces us into select Vanguard ETFs that are HMRC Reporting (this is fine ... as soon as I learned about this a year ago I moved everything slowly from mutual funds to reporting ETFs, and the market drops at the end of last year meant I could do this relatively cheaply). While (2) does not prevent us from continuing to hold the ETF shares I already own (as I understand it), it prevents us from buying new shares. But (3) prevents us from buying any PRIIP-compliant UK funds.

This would seem to leave us with one option: individual shares through either a US or UK broker. However, my wife's company prohibits transactions in individual shares, leaving us pretty much out of luck. I should note that another problem often cited by expats--brokerages closing their accounts or preventing further purchases--may also be a problem, though Fidelity seems to allow us to keep our accounts open and may allow additional purchases, though I have to confirm this ( https://www.fidelity.com/trading/faqs-a ... aq_about15).

So I'm feeling a bit trapped, as we will not be able to retire on schedule without making substantial investments over the next ten years. I wanted to float a few options I've been considering to see what others think:

(1) Invest in something besides equities. E.g., leave current investments untouched and put new funds into real estate, or government-issued securities (which are not barred by the UK/US/EU/Firm rules). I don't want to do this, but I will if it is the best option available.

(2) Don't tell Fidelity that we're moving and keep investing through my US brokerage. I mention this only because I see this approach mentioned frequently; however, I am not at all comfortable with it and wish to remain in compliance with regulatory requirements (and institutional/contractual requirements). Moreover, (a) even if this approach has worked in the past for people, I suspect companies' abilities to police this will only increase over time, (b) I worry that there may be unintended state tax implications, and (c) I'd prefer if at all possible to keep at least a decent percentage of our assets in the UK if we are living there for an extended period.

(3) This is one I haven't seen discussed: "pre-purchase" our next ten years of equity investments before expatriating. This requires some explanation. Our current asset allocation is 70:30, and we plan to gradually ramp down to 55:45 by retirement. If I model out the next ten years using conservative growth assumptions, I expect that we will put an additional 360k into equities over the next 10-11 years, starting with around 40k/year until in the final year or two we would only be buying bonds. We currently hold about 410k in bonds. Thus, I was exploring whether it made sense to sell all but 50k of our bonds and move to a 96:4 asset allocation right now, sticking with the plan of ramping down to 55:45. We would essentially just be buying all the stock we're ever going to buy right now and would leave it untouched, then let our stock allocation percentage decline gradually as all new funds would go into government issued securities.

I'm leaning toward option 3, though it is obviously rather risky (especially at current valuations). This would dramatically increase our short-term risk exposure (and our inability to buy new stocks would mean rebalancing options would be very limited should the market drop). But those downsides may be acceptable if the only other alternative is to stick to real estate or low-return government debt (or Bitcoin! ... only kidding). Is there another way around this? Very grateful for any thoughts folks can offer, apart from giving up US citizenship, which I do not consider an option, at least in the medium term.
Last edited by DouroBound on Wed Jul 10, 2019 1:42 pm, edited 1 time in total.

Topic Author
DouroBound
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Re: US investor moving to UK; practical options if I cannot purchase ANY equities going forward

Post by DouroBound » Wed Jul 10, 2019 1:41 pm

Addendum to my post above: I failed to account for the impact of all these rules on UK pension fund contributions and US retirement accounts. My understanding is that contributions to UK pension accounts should be fine under all the various rules (subject to different deductibility limits between the US and UK). If this is the case, I guess most of the required equity investments over the next 10 years might be met from UK pension fund contributions, meaning I would be able to reduce the size of the required pre-move stock purchase under option 3.

The problem may also be mitigated if I am able to transact within my solo-401(k) held through a US brokerage, though it's unclear to me whether PRIIPs affects these transactions. I gather pension funds are excluded from PRIIPs, but other threads suggest that brokerages are still researching this issue. Do any EU/UK based US investors have experience making trades within a solo-401(k) (or tIRA) since PRIIPs came into effect?

TedSwippet
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Re: US investor moving to UK; practical options if I cannot purchase ANY equities going forward

Post by TedSwippet » Wed Jul 10, 2019 5:04 pm

DouroBound wrote:
Wed Jul 10, 2019 1:41 pm
The problem may also be mitigated if I am able to transact within my solo-401(k) held through a US brokerage, though it's unclear to me whether PRIIPs affects these transactions. I gather pension funds are excluded from PRIIPs, but other threads suggest that brokerages are still researching this issue.
UK pension providers will be bound by PRIIPs, so one can no more hold a US domiciled fund or ETF in a UK pension (SIPP) as in a taxable account. However, the US's spiteful PFIC tax rules do not apply to holdings inside pensions, and UK pensions mostly(*) qualify as 'pensions' under the US/UK tax treaty. That means you can safely hold EU and UCITS funds and ETFs inside one, just like every other non-US citizen, without running up against PFIC. This is indeed probably a partial escape hatch for you.

(*) I say 'mostly' above because there is discussion and dissent even among professionals as to whether a UK personal pension such as a SIPP qualifies under the treaty in the same way as an employer pension. Some say yes, others no, and the IRS has of course never bothered to clarify anything either way. My suggestion would be to take an assertive position on your US return and wait for the IRS to challenge it. My guess is that it's extremely unlikely that they would, not least because they don't understand this stuff any more clearly than the rest of us. Probably less clearly, in fact.
DouroBound wrote:
Wed Jul 10, 2019 1:41 pm
Do any EU/UK based US investors have experience making trades within a solo-401(k) (or tIRA) since PRIIPs came into effect?
I do. I'm a US NRA, and have had no issues so far with Vanguard US and PRIIPs, in any of my tIRA, Roth IRA, and ex-employer 401k. I would not expect any either, since Vanguard US is not bound by EU regulations.

The one notable problem I do have with Vanguard US is an inability to use ETFs. No brokerage option, meaning I can only use mutual funds. However, that's not a problem unless the US/UK tax treaty breaks down. Symmetrically with the above, US retirement plans are protected by treaty, meaning that the UK's 'reporting fund' stuff doesn't reach into my IRAs or 401k. The only unsheltered thing I hold in Vanguard US is a small cash float in the prime money market fund.

In summary then, pensions can protect you from both the US's PFIC rules and any UK 'reporting status' issues. You should be able to use them, in tandem with the treaty, to at least partially mitigate your problems. It sounds like you will still be locked out of any non-pension investing though, so both taxable accounts and UK ISAs will be effectively off-limits for you. The other risk for you is that you are relying on having UK 'pensionable earnings' to push into your investments, and if you have years when these are limited you will be stuck for investing options.

Finally, you'll want to be entirely certain that your current US 401k/IRA provider will let you keep your accounts when you move to the UK, and also that you can find a UK provider willing to take you on as a US citizen. Both of these things are now much less certain than before, thanks to FATCA.

Topic Author
DouroBound
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Re: US investor moving to UK; practical options if I cannot purchase ANY equities going forward

Post by DouroBound » Wed Jul 10, 2019 8:24 pm

TedSwippet wrote:
Wed Jul 10, 2019 5:04 pm
DouroBound wrote:
Wed Jul 10, 2019 1:41 pm
The problem may also be mitigated if I am able to transact within my solo-401(k) held through a US brokerage, though it's unclear to me whether PRIIPs affects these transactions. I gather pension funds are excluded from PRIIPs, but other threads suggest that brokerages are still researching this issue.
UK pension providers will be bound by PRIIPs, so one can no more hold a US domiciled fund or ETF in a UK pension (SIPP) as in a taxable account. However, the US's spiteful PFIC tax rules do not apply to holdings inside pensions, and UK pensions mostly(*) qualify as 'pensions' under the US/UK tax treaty. That means you can safely hold EU and UCITS funds and ETFs inside one, just like every other non-US citizen, without running up against PFIC. This is indeed probably a partial escape hatch for you.

(*) I say 'mostly' above because there is discussion and dissent even among professionals as to whether a UK personal pension such as a SIPP qualifies under the treaty in the same way as an employer pension. Some say yes, others no, and the IRS has of course never bothered to clarify anything either way. My suggestion would be to take an assertive position on your US return and wait for the IRS to challenge it. My guess is that it's extremely unlikely that they would, not least because they don't understand this stuff any more clearly than the rest of us. Probably less clearly, in fact.
DouroBound wrote:
Wed Jul 10, 2019 1:41 pm
Do any EU/UK based US investors have experience making trades within a solo-401(k) (or tIRA) since PRIIPs came into effect?
I do. I'm a US NRA, and have had no issues so far with Vanguard US and PRIIPs, in any of my tIRA, Roth IRA, and ex-employer 401k. I would not expect any either, since Vanguard US is not bound by EU regulations.

The one notable problem I do have with Vanguard US is an inability to use ETFs. No brokerage option, meaning I can only use mutual funds. However, that's not a problem unless the US/UK tax treaty breaks down. Symmetrically with the above, US retirement plans are protected by treaty, meaning that the UK's 'reporting fund' stuff doesn't reach into my IRAs or 401k. The only unsheltered thing I hold in Vanguard US is a small cash float in the prime money market fund.

In summary then, pensions can protect you from both the US's PFIC rules and any UK 'reporting status' issues. You should be able to use them, in tandem with the treaty, to at least partially mitigate your problems. It sounds like you will still be locked out of any non-pension investing though, so both taxable accounts and UK ISAs will be effectively off-limits for you. The other risk for you is that you are relying on having UK 'pensionable earnings' to push into your investments, and if you have years when these are limited you will be stuck for investing options.

Finally, you'll want to be entirely certain that your current US 401k/IRA provider will let you keep your accounts when you move to the UK, and also that you can find a UK provider willing to take you on as a US citizen. Both of these things are now much less certain than before, thanks to FATCA.
I can't overstate how incredibly helpful this is. Thank you! I'm fairly sure Fidelity will let me keep my accounts based on the website, though they may restrict trading to sales (in which case I would be limited to the UK pension for new equity purchases). It seems strange that you are limited to mutual funds with Vanguard ... I was under the impression that mutual funds were harder to purchase as a non-resident, which along with the UK rules is one of the reasons I switched to ETFs. But that may just be for brokerages. I'll have to confirm specific restrictions with Fidelity for UK residents and I'll post to the forum for anyone in a similar boat. Thanks again.

typical.investor
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Re: US investor moving to UK; practical options

Post by typical.investor » Wed Jul 10, 2019 9:05 pm

Try Schwab UK.

The account is operated under US laws (SIPC etc) and I believe offers access to US domiciled funds which means you can avoid PFIC rules.

Some Vanguard ETFs are UK reporting, and cost $4.95 to trade. Sorry, no mutual funds per regulation for non-US investors.

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Watty
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Re: US investor moving to UK; practical options

Post by Watty » Wed Jul 10, 2019 9:25 pm

One other thing to add to your list is review your wills, power of attorney, medical directives, etc to make sure that you have versions that will work in both countries. I don't have a clue how that works but I would think that it could get complicated.

Topic Author
DouroBound
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Re: US investor moving to UK; practical options

Post by DouroBound » Wed Jul 10, 2019 11:03 pm

Watty wrote:
Wed Jul 10, 2019 9:25 pm
One other thing to add to your list is review your wills, power of attorney, medical directives, etc to make sure that you have versions that will work in both countries. I don't have a clue how that works but I would think that it could get complicated.
added to the (ever growing) list. thanks!

Topic Author
DouroBound
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Re: US investor moving to UK; practical options

Post by DouroBound » Wed Jul 10, 2019 11:06 pm

typical.investor wrote:
Wed Jul 10, 2019 9:05 pm
Try Schwab UK.

The account is operated under US laws (SIPC etc) and I believe offers access to US domiciled funds which means you can avoid PFIC rules.

Some Vanguard ETFs are UK reporting, and cost $4.95 to trade. Sorry, no mutual funds per regulation for non-US investors.
Unfortunately we won't have a choice on brokerages, at least as long as my wife is with her current company, which requires us to use a designated firm. But I've added this recommendation to the file I keep in case circumstances change. Thanks.

TedSwippet
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Re: US investor moving to UK; practical options if I cannot purchase ANY equities going forward

Post by TedSwippet » Thu Jul 11, 2019 2:44 am

DouroBound wrote:
Wed Jul 10, 2019 8:24 pm
I'm fairly sure Fidelity will let me keep my accounts based on the website, though they may restrict trading to sales (in which case I would be limited to the UK pension for new equity purchases).
Fidelity are known to be ... odd when it comes to handling non-US residents. A few anecdotal reports have suggested forced account closure, but mostly it seems to come down to restrictions on what you can and cannot do inside the account. It may also vary depending on which country you live in, whether or not it has a tax treaty (not that, again anecdotally, Fidelity will necessarily apply the right treaty treatment), and so on.
DouroBound wrote:
Wed Jul 10, 2019 8:24 pm
It seems strange that you are limited to mutual funds with Vanguard ... I was under the impression that mutual funds were harder to purchase as a non-resident, which along with the UK rules is one of the reasons I switched to ETFs. But that may just be for brokerages. I'll have to confirm specific restrictions with Fidelity for UK residents and I'll post to the forum for anyone in a similar boat.
I got the sense that this Vanguard no-brokerage-option thing was a result of my being a non-US citizen NRA, with a W-8BEN on file with them, so you might not get the same issue. It seems though that these brokers are now making up stuff on the fly for nonresidents, since their procedures and restrictions seem to vary greatly. Hopefully Fidelity has a better two-factor auth system than Vanguard's. Vanguard supports only US format mobile phone numbers, and so simply won't work for non-US residents, full stop.

Anyway, glad that's been of use. Good luck in getting it all sorted out, at least to the extent that you can. I would suggest firing off a harsh mail to your congress person pointing out what an appalling hindrance these US tax rules are for you, but without accompanying it with a lobbyist offering a sufficient bribe that's likely to be a waste of your time. Perhaps cathartic, though.

TedSwippet
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Re: US investor moving to UK; practical options

Post by TedSwippet » Thu Jul 11, 2019 5:35 am

DouroBound wrote:
Wed Jul 10, 2019 11:21 am
... apart from giving up US citizenship, which I do not consider an option, at least in the medium term.
One other thought, on this. If you do ever come to considering giving up US citizenship, be aware of the US's nasty 'exit tax'. This kicks in at $2MM of assets, not indexed to inflation. Note also the proposals to worsen this further.

Once the exit tax does apply, you can face a pretty hefty tax just for ridding yourself of US citizenship. The capital gains aspects of it are not too bad, but the full US tax on your pensions as if taken all in one day, even though not, are heinous. A tax on phantom income that has to be paid with real money. It can also easily become double-tax, because countries only ever allow foreign tax credits for taxes paid on actual income, whereas here the US has created a legal fiction of income that doesn't actually exist (and then taxed you on it anyway).

I know you stated that you didn't want to consider this option, at least not yet, but the exit tax is something to bear in mind that could impact on the timing if you do decide later that this is in fact the right thing for you to do. An increasing number of dual US/other citizens living around the world are finding that shedding their US citizenship is becoming necessary simply to survive financially in their own countries.

Finally, be sure to confirm what I've suggested with a good read of the US/UK tax treaty. I am used to parsing it in the context of a non-US citizen living in the UK. For US citizens though, a lot of it will not apply due to the 'saving clause', whereby the US disallows treaty benefits to US citizens except for a few noted exemptions. See article 1 para 4 and 5. I'm reasonably sure that pension are one of those things that the saving clause exempts, but do please check that for yourself.

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DouroBound
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Re: US investor moving to UK; practical options

Post by DouroBound » Thu Jul 11, 2019 8:29 pm

TedSwippet wrote:
Thu Jul 11, 2019 5:35 am
Once the exit tax does apply, you can face a pretty hefty tax just for ridding yourself of US citizenship. The capital gains aspects of it are not too bad, but the full US tax on your pensions as if taken all in one day, even though not, are heinous. A tax on phantom income that has to be paid with real money. It can also easily become double-tax, because countries only ever allow foreign tax credits for taxes paid on actual income, whereas here the US has created a legal fiction of income that doesn't actually exist (and then taxed you on it anyway).

I know you stated that you didn't want to consider this option, at least not yet, but the exit tax is something to bear in mind that could impact on the timing if you do decide later that this is in fact the right thing for you to do. An increasing number of dual US/other citizens living around the world are finding that shedding their US citizenship is becoming necessary simply to survive financially in their own countries.
Good to keep in mind, though by the time I'm eligible for a second passport (6 years at the earliest I think), who knows what the rules will be. To save myself the stress, I think I'll put this one out of my mind until then and operate under the assumption that I'll be keeping my citizenship. Thankfully my wife and I hold most of our assets jointly (and our pensions are comparable sizes), so I think we'd both be able to get under the $2mil threshold if it remains the same. Thanks for flagging the pension issue though ... I'd convinced myself after a quick reading that the capital gains piece would not hit too hard (if at all), but I'd forgotten about the pension bit. Ouch. Pretty awful tax policy.

TedSwippet
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Re: US investor moving to UK; practical options

Post by TedSwippet » Fri Jul 12, 2019 3:29 am

DouroBound wrote:
Thu Jul 11, 2019 8:29 pm
Good to keep in mind, though by the time I'm eligible for a second passport (6 years at the earliest I think), who knows what the rules will be. To save myself the stress, I think I'll put this one out of my mind until then and operate under the assumption that I'll be keeping my citizenship.
Your wife, though, is in a position to renounce as soon as you no longer live in the US. As the spouse of a US citizen, she could also reinstate US residency relatively quickly and smoothly if needed again later. And as a non-US person, she would be financially much freer than you are, and so could do some of the investing for both of you. Just a thought.
DouroBound wrote:
Thu Jul 11, 2019 8:29 pm
Thanks for flagging the pension issue though ... I'd convinced myself after a quick reading that the capital gains piece would not hit too hard (if at all), but I'd forgotten about the pension bit. Ouch. Pretty awful tax policy.
Also section 2801 tax of 40% or highest estate rate in existence at the time on post-expatriation gifts and bequests to US citizens, payable by the recipients. If you have (or plan to have) children and they are (or will be) US citizens, a potential high risk there. So far there's no route to compliance. After a full eleven years since the exit tax law passed, the IRS has yet to issue final regulations and forms for this (it is currently 'deferred' under the proposed regulations). Lurking in the shadows, though.

Topic Author
DouroBound
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Re: US investor moving to UK; practical options

Post by DouroBound » Sun Jul 14, 2019 12:57 am

TedSwippet wrote:
Fri Jul 12, 2019 3:29 am

Your wife, though, is in a position to renounce as soon as you no longer live in the US. As the spouse of a US citizen, she could also reinstate US residency relatively quickly and smoothly if needed again later. And as a non-US person, she would be financially much freer than you are, and so could do some of the investing for both of you. Just a thought.
True. Though we're both of the view that we should always try to maintain at least one passport in common, now that we've achieved that. In our view (informed by some recent frustrations around an abandoned move), things change too fast in the immigration landscape to assume that easy partner visas will always be a foregone conclusion. We like the security of knowing there is at least one country where we have rights to live and work together without seeking additional approvals.

halfnine
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Re: US investor moving to UK; practical options

Post by halfnine » Wed Jul 17, 2019 2:06 pm

DouroBound wrote:
Sun Jul 14, 2019 12:57 am
TedSwippet wrote:
Fri Jul 12, 2019 3:29 am

Your wife, though, is in a position to renounce as soon as you no longer live in the US. As the spouse of a US citizen, she could also reinstate US residency relatively quickly and smoothly if needed again later. And as a non-US person, she would be financially much freer than you are, and so could do some of the investing for both of you. Just a thought.
True. Though we're both of the view that we should always try to maintain at least one passport in common, now that we've achieved that. In our view (informed by some recent frustrations around an abandoned move), things change too fast in the immigration landscape to assume that easy partner visas will always be a foregone conclusion. We like the security of knowing there is at least one country where we have rights to live and work together without seeking additional approvals.
For 8 years my spouse, children and I did not all share a common citizenship. LIfe was incredibly problematic and our options were limited until this was resolved. You are wise to ensure that you both always share a common passport. Those who have never experienced the alternative would not understand.

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