UK resident non-dom: what's best investment location?

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Topic Author
stressed
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UK resident non-dom: what's best investment location?

Post by stressed » Mon Feb 26, 2018 7:01 am

Hello all,
I'm sorry if this has been covered before. I did search but I can't find a conclusive answer.
I am UK tax resident (for a little over a decade now), non domiciled, expecting to return to my home in continental Europe at some point (after retirement most likely). Looking for the best jurisdiction/domicile for ETFs (investing through Interactive Brokers). My understanding so far:

- USA:
(+)
best availability/costs (bid-offer spreads, transaction costs and carry/expense ratios).
(-)
potential US estate liability as nil band for non residents is only $60k.
Higher div tax withholding but there is US/UK tax treaty so not sure this matters
potentially becoming non-reporting offshore funds therefore triggering higher (income) tax charges in the UK? (https://www.gov.uk/government/publicati ... ting-funds)

- Ireland:
(+)
No issue with US estate tax, minimal div tax withholding, potentially outside UK tax net if/when needed (massive CGT one year may justify paying remittance charge, IHT eventually)
(-)
higher transaction costs, bid offer spreads, etc.
potentially becoming non-reporting offshore funds (as above)

- UK:
(+) no issue with non-reporting for UK tax purposes
(-) high costs, lowest availability and max taxation otherwise

What is the conventional wisdom? I've read several posts, people seem to be leaning towards Ireland. Is it mainly for the US estate tax issue highlighted above or is there something else I'm missing?

Thanks in advance

TedSwippet
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Location: UK

Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Mon Feb 26, 2018 10:32 am

Welcome.
stressed wrote:
Mon Feb 26, 2018 7:01 am
What is the conventional wisdom? I've read several posts, people seem to be leaning towards Ireland. Is it mainly for the US estate tax issue highlighted above or is there something else I'm missing?
For residents of countries with neither of a US income tax treaty and a US estate tax treaty, Ireland domiciled ETFs from Vanguard or iShares are obvious choices for passive investors. These folk both reduce their US tax payable on dividends, from 30% down to between 15% and 0% depending on what the ETF holds, and at the same time completely remove themselves from tangling with the US's outrageous estate tax for non-resident aliens.

In a country with a income tax treaty and an estate tax treaty, the decision becomes a bit more nuanced. The treaty rate on dividends is usually 15%, so an S&P500 tracker might be tax-neutral between US and Ireland domicile, but the Ireland version probably has slightly higher charges and maybe a slightly wider spread. Conversely, buying a US domiciled ETF the holds only non-US stocks produces an entirely deadweight 15% tax loss to the US, something that may or may not be creditable against local taxes. Balanced against this, the non-US country might apply disadvantageous taxes to 'offshore' funds (for example, the UK 'reporting' regime you mention above).

In a country with an income tax treaty but no estate tax treaty, the dividend decision is as in the previous paragraph, but with the risk of losing 40% of the balance over $60k to US estate tax. Compare with the $11mm exemption allowed to US citizens.

Now, the UK has both income and estate tax treaties with the US. The dividend tax rate is 15%, and the estate tax exemption is effectively $11mm. But... to use the estate tax exemption you have to be either a UK national or UK domiciled, and while I don't know in detail how the UK non-dom scheme works, it seems like this might mean that you cannot use it. In that case you would have to check out the details of any estate tax treaty between your country of nationality and the US to see if that would cover you. As far as I recall most don't -- only very few use nationality as a controlling element -- but you should look for yourself.

And added to all of this, a new EU regulation known as MiFID II (actually, PRIIPS) is making it hard for EU residents to buy US domiciled ETFs and mutual funds.

So... what should you do?

Easiest is of course to use the same ETFs and other investments regularly used by UK investors. Ireland domiciled ETFs should not fall outside the UK reporting funds regime, as they are all UCITS compliant. It is possible I suppose that Brexit could throw a spanner into the works, but since these things are so commonly held by UK investors it seems pretty well unthinkable that they could become problems. In practice nearly all iShares EU and Vanguard EU ETFs traded on the LSE are domiciled in either Ireland or Luxembourg. These things are a solid part of the UK investing firmament, then. Because the UK does not (or more accurately, did not, until recently) offer an attractive ETF domicile, you can count the number of UK domiciled ETFs on the fingers of one hand.

US domiciled funds will be trickier to source and hold. You may have to be very careful not to fall outside the US reporting funds regime, although again I do not know how that interacts with UK non-dom status (perhaps the latter gives you some protection -- not my area I'm afraid). And as a non-dom the risk of US estate tax if you hold these could be much worse for you than for your UK citizen workmates and neighbours.

You probably also want to see how your home country would treat these investment types when you eventually return there.

Valuethinker
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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Mon Feb 26, 2018 11:00 am

TedSwippet wrote:
Mon Feb 26, 2018 10:32 am
. But... to use the estate tax exemption you have to be either a UK national or UK domiciled, and while I don't know in detail how the UK non-dom scheme works, it seems like this might mean that you cannot use it. In that case you would have to check out the details of any estate tax treaty between your country of nationality and the US to see if that would cover you. As far as I recall most don't -- only very few use nationality as a controlling element -- but you should look for yourself.
OP is paying either £30k or £60k pa to register for non domiciled status.

https://www.gov.uk/tax-foreign-income/n ... -residents

I would recommend OP seeks out a qualified accountant- -they can afford that given the amounts at stake, above.

Your advice is all extremely thorough and knowledgeable (as always on these matters ;-)) but this really is an issue where someone needs to have professional tax advice.

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Hyperborea
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Re: UK resident non-dom: what's best investment location?

Post by Hyperborea » Mon Feb 26, 2018 1:25 pm

Valuethinker wrote:
Mon Feb 26, 2018 11:00 am
TedSwippet wrote:
Mon Feb 26, 2018 10:32 am
. But... to use the estate tax exemption you have to be either a UK national or UK domiciled, and while I don't know in detail how the UK non-dom scheme works, it seems like this might mean that you cannot use it. In that case you would have to check out the details of any estate tax treaty between your country of nationality and the US to see if that would cover you. As far as I recall most don't -- only very few use nationality as a controlling element -- but you should look for yourself.
OP is paying either £30k or £60k pa to register for non domiciled status.

https://www.gov.uk/tax-foreign-income/n ... -residents

I would recommend OP seeks out a qualified accountant- -they can afford that given the amounts at stake, above.

Your advice is all extremely thorough and knowledgeable (as always on these matters ;-)) but this really is an issue where someone needs to have professional tax advice.
They might not be paying yet. There's a window of 6 years in the current law allowing one to be hold non-do status without any remittance (before Brexit I was considering a 5-6 year non-dom status as a way to use Britain as a base for exploring Europe). But I do agree that they should consider some pro advice. The discussion board info can give them a good start to know what to ask though.
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray

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stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Tue Feb 27, 2018 3:01 pm

Thanks for the replies. To start from the last point raised, non-dom status exists, doesn't need registration, the £30/60k per year is in order to claim the remittance basis of taxation for offshore gains/income for a particular tax year. It's an election that is per year only so some years it's worth paying it, some isn't. In my case I used it prior to being 7 years here (so there was no charge), and haven't used it since (wasn't worth it) but most likely will use it for this tax year and pay the charge for the first time.

Therefore the option to use this remittance basis of taxation givens non-doms an incentive to keep investments outside the UK (it's a free option, in a windfall tax year you can use it, or not). There's also IHT benefits in keeping investments outside the UK (but only if you have been UK resident for maximum 15 out of the last 20 years, which works well if you plan to retire outside the UK and die >5 years after you stop being UK resident).

I also realized (correct me if I'm wrong) that the non-reporting issue only applies to funds, not ETFs so that means that there's zero incentive in keeping investments in the UK. The question then becomes US versus Ireland.

Coming back to the IHT issue, the estate tax treaty is an interesting point. Given that the marginal rate is the same (40%), once I have been UK resident for more than 15 years, and therefore deemed UK domiciled for IHT purposes, the US estate tax becomes a non issue. It's only an issue for the next 2-3 years. So an optimal solution could be to buy Ireland denominated ETFs for now and switch to US ones later.

However, I considered another option: a life insurance policy to cover the US estate tax. A policy for up to about 65 years of age costs around 7-8 bps per year. Estate tax is 40% of assets, so on the portfolio level the insurance cost is about 3bp. The expense ratio of most US ETFs is lower than EU equivalents by significantly more than 3bp, and bid-offer spreads and transaction costs further tilt the scale in favor of them. Isn't it optimal then for someone who is not in retirement to invest in US based ETFs and get insurance policy for whatever amount they need just to cover the US estate tax? This by the way would apply to not only UK based investors but everyone in US treaty countries (to avoid div tax withholding).

Thoughts on this?

TedSwippet
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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Tue Feb 27, 2018 6:17 pm

I will start with a disclaimer that I know only the superficial parts of how UK non-dom status works, and virtually nothing about how it would intersect with UK IHT, US estate taxes, and any of the (several, in your case) tax treaties involved. You and/or your financial adviser really need to understand this area in detail. Well "above my paygrade", in other words.
stressed wrote:
Tue Feb 27, 2018 3:01 pm
I also realized (correct me if I'm wrong) that the non-reporting issue only applies to funds, not ETFs so that means that there's zero incentive in keeping investments in the UK. The question then becomes US versus Ireland.
I am not quite clear what you are asking. If it is, are ETFs and unit trusts/OEICs treated differently here?, the answer is no. An FT article from several years ago (before 'reporting status' was renamed it was known as 'distributor status') shows how quite a few UK ETF investors could have been caught out by sleepwalking into buying inappropriate ETFs.

As for non-dom-ness, this article appears to point to reporting funds as being likely better options for UK non-doms, though I am not certain I can follow the logic in it (but then, as a non-non-dom I don't have to be able to!). And this page from HMRC suggests that any ETF income component that arises from UK sources is fully UK taxed even for non-doms, so if you bought a US domiciled UK FTSE 100 tracker ETF your remittance basis protection wouldn't save you.
stressed wrote:
Tue Feb 27, 2018 3:01 pm
Coming back to the IHT issue, the estate tax treaty is an interesting point. Given that the marginal rate is the same (40%), once I have been UK resident for more than 15 years, and therefore deemed UK domiciled for IHT purposes, the US estate tax becomes a non issue. It's only an issue for the next 2-3 years. So an optimal solution could be to buy Ireland denominated ETFs for now and switch to US ones later.
The US/UK estate tax treaty is here. Article 4 tells you if you would be UK domiciled under the treaty. Treaties often define terms differently to the way they are commonly understood, so well worth taking the time to be sure you are on firm ground here.

However, the UK's IHT is hardly benign either. 40% of everything above between £325k and £1mm depending on your marital and family status is usurious. If you can avoid both it and the US estate tax, I think you should. One way may be to leave the UK before IHT would apply.

You could buy Ireland domiciled ETFs and switch to US ones later, but again you would have to watch out for potential taxes on switching, since a switch could generate a taxable capital gain (again, don't know the detail of non-dom-ness here though). Or as you say, taking insurance to cover US estate tax might be a viable option if you can source it at a low enough cost.
stressed wrote:
Tue Feb 27, 2018 3:01 pm
However, I considered another option: a life insurance policy to cover the US estate tax. A policy for up to about 65 years of age costs around 7-8 bps per year. ... This by the way would apply to not only UK based investors but everyone in US treaty countries (to avoid div tax withholding).
The life insurance idea is a useful one to neuter US estate tax where there's a danger of it, but I don't see how it would avoid any dividend tax withholding.

Taking a S&P 500 tracker ETF as an example, a US domiciled one would pay the complete dividend but the broker would subtract 15% (typically this is the US income tax treaty rate) before passing this on to the investor. An Ireland domiciled one would see 15% in US tax withholding taken off the dividends paid to the ETF by the stocks held, and then the remaining dividend is paid out to the investor. Same result in both cases -- 85% of stock dividends received. The UK tax outcome of these two is a bit different for the average UK investor, but then the average UK investor also has nothing to worry about from US estate taxes thanks to the US/UK estate tax treaty.
Last edited by TedSwippet on Sat Mar 10, 2018 3:49 am, edited 1 time in total.

Topic Author
stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Thu Mar 01, 2018 2:53 pm

TedSwippet wrote:
Tue Feb 27, 2018 6:17 pm
I will start with a disclaimer that I know only the superficial parts of how UK non-dom status works, and virtually nothing about how it would intersect with UK IHT, US estate taxes, and any of the (several, in your case) tax treaties involved. You and/or your financial adviser really need to understand this area in detail. Well "above my paygrade", in other words.
Sure, understood. I don't have a financial advisor by the way, as I prefer to do my own research. But I appreciate your disclaimer.
TedSwippet wrote:
Tue Feb 27, 2018 6:17 pm
stressed wrote:
Tue Feb 27, 2018 3:01 pm
I also realized (correct me if I'm wrong) that the non-reporting issue only applies to funds, not ETFs so that means that there's zero incentive in keeping investments in the UK. The question then becomes US versus Ireland.
I am not quite clear what you are asking. If it is, are ETFs and unit trusts/OEICs treated differently here?, the answer is no. An FT article from several years ago (before 'reporting status' was renamed it was known as 'distributor status') shows how quite a few UK ETF investors could have been caught out by sleepwalking into buying in appropriate ETFs.
Very interesting, so I stand corrected there. It DOES apply to ETFs, although most of the popular ones have reporting status. This is not a non-dom issue by the way. It affects all UK tax residents, so I'm surprised that I only read about it just now, and that it's not a bigger concern among UK based investors. There ARE some products that are popular and I wonder if people are aware of this issue. Perhaps deserves a separate post.
TedSwippet wrote:
Tue Feb 27, 2018 6:17 pm
stressed wrote:
Tue Feb 27, 2018 3:01 pm
Coming back to the IHT issue, the estate tax treaty is an interesting point. Given that the marginal rate is the same (40%), once I have been UK resident for more than 15 years, and therefore deemed UK domiciled for IHT purposes, the US estate tax becomes a non issue. It's only an issue for the next 2-3 years. So an optimal solution could be to buy Ireland denominated ETFs for now and switch to US ones later.
The US/UK estate tax treaty is here. Article 4 tells you if you would be UK domiciled under the treaty. Treaties often define terms differently to the way they are commonly understood, so well worth taking the time to be sure you are on firm ground here.

However, the UK's IHT is hardly benign either. 40% of everything above between £325k and £1mm depending on your marital and family status is usurious. If you can avoid both it and the US estate tax, I think you should. One way may be to leave the UK before IHT would apply.

You could buy Ireland domiciled ETFs and switch to US ones later, but again you would have to watch out for potential taxes on switching, since a switch could generate a taxable capital gain (again, don't know the detail of non-dom-ness here though). Or as you say, taking insurance to cover US estate tax might be a viable option if you can source it at a low enough cost.
So based on the tax treaty, US estate taxes are basically offset by a credit for the UK IHT, which is at the same rate (assuming one is above the NRB) so it's a wash. This will be the case for me in a few years, and is the case for all UK tax residents and UK domiciled. Given this, one of the two reasons to avoid US products (the US estate tax) becomes a non issue.
TedSwippet wrote:
Tue Feb 27, 2018 6:17 pm

stressed wrote:
Tue Feb 27, 2018 3:01 pm
However, I considered another option: a life insurance policy to cover the US estate tax. A policy for up to about 65 years of age costs around 7-8 bps per year. ... This by the way would apply to not only UK based investors but everyone in US treaty countries (to avoid div tax withholding).
The life insurance idea is a useful one to neuter US estate tax where there's a danger of it, but I don't see how it would avoid any dividend tax withholding.

Taking a S&P 500 tracker ETF as an example, a US domiciled one would pay the complete dividend but the broker would subtract 15% (typically this is the US income tax treaty rate) before passing this on to the investor. An Ireland domiciled one would see 15% in US tax withholding taken off the dividends paid to the ETF by the stocks held, and then the remaining dividend is paid out to the investor. Same result in both cases -- 85% of stock dividends received. The UK tax outcome of these two is a bit different for the average UK investor, but then the average UK investor also has nothing to worry about from US estate taxes thanks to the US/UK estate tax treaty.
So given the tax treaty, the divident situation is also the same for US and Irish products, which negates the other supposed disadvantage of US products (the div tax withholding).
What is therefore the point for a UK based investor who is above the IHT NRB to trade Irish denominated ETFs given that they have higher fees and transaction costs? Aren't US products better?

TedSwippet
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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 01, 2018 4:23 pm

stressed wrote:
Thu Mar 01, 2018 2:53 pm
What is therefore the point for a UK based investor who is above the IHT NRB to trade Irish denominated ETFs given that they have higher fees and transaction costs? Aren't US products better?
US products can sometimes be slightly better for UK investors. But the edge might not be as large as imagined in most cases, and the risks and other costs can quickly overwhelm it.

For example, VUSD is Vanguard's Ireland domiciled S&P500 tracker, and has a 0.07% annual management fee. VOO is Vanguard's US domiciled S&P500 tracker, and it has a 0.04% expense ratio.

Mathematically that is close to half, but practically the difference comes out to £30 on a £100k investment, so not worth the hassle for most people. Moreover, set against a 1% to 1.5% broker forex fee to move GBP to USD in order to buy the US domiciled fund, it could take more than 30 years to break even from the lower annual management fees. 60 years if you include the cost of transferring back from USD to GBP. And all this assuming the investor can correctly navigate the 'reporting status' UK tax traps.

The one area where it does make sense for UK investors to use US domiciled ETFs is to track US markets in pensions. Here the US/UK tax treaty says that US stocks and (by extension) US domiciled ETFs must pay dividends to pensions with 0% US tax withholding, and UK 'reporting status' is irrelevant in a pension. Not all UK pension providers will follow the US rules to obtain that 0% rate, but some will. In contrast, holding an Ireland domiciled ETF tracking US markets in a UK pension would still suffer the 15% in US tax withholding on dividends paid to it by the underlying stocks, and with no way for either the pension scheme or the end investor to reclaim that. So the US domiciled ETF provides a usable edge in this case.

But... in practical terms, the new EU MiFID II and PRIIPS regulations now make it extremely hard to access US domiciled ETFs from UK brokers and platforms, including pensions. So even where there is a potential benefit to the UK investor in holding a US domiciled ETF, it might be impossible for many (if not all) investors to achieve it.

Topic Author
stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Fri Mar 02, 2018 6:14 am

TedSwippet wrote:
Thu Mar 01, 2018 4:23 pm
Mathematically that is close to half, but practically the difference comes out to £30 on a £100k investment, so not worth the hassle for most people. Moreover, set against a 1% to 1.5% broker forex fee to move GBP to USD in order to buy the US domiciled fund, it could take more than 30 years to break even from the lower annual management fees. 60 years if you include the cost of transferring back from USD to GBP. And all this assuming the investor can correctly navigate the 'reporting status' UK tax traps.
I agree, this is true for the typical UK retain brokerages. When one uses an Interactive Brokers account though, investing in any exchange is equally easy, fx conversion is very easy and practically free, and trading fees in US exchanges are a tiny fraction of what they are for European ones. So transaction cots further tilt the scale in favour of US listed ETFs. Am I missing something?
TedSwippet wrote:
Thu Mar 01, 2018 4:23 pm
The one area where it does make sense for UK investors to use US domiciled ETFs is to track US markets in pensions. Here the US/UK tax treaty says that US stocks and (by extension) US domiciled ETFs must pay dividends to pensions with 0% US tax withholding, and UK 'reporting status' is irrelevant in a pension. Not all UK pension providers will follow the US rules to obtain that 0% rate, but some will. In contrast, holding an Ireland domiciled ETF tracking US markets in a UK pension would still suffer the 15% in US tax withholding on dividends paid to it by the underlying stocks, and with no way for either the pension scheme or the end investor to reclaim that. So the US domiciled ETF provides a usable edge in this case.
Very interesting. I need to move my pension to a SIPP and convert the funds to US trackers. Presumably that would apply to all US trackers including bond and international stock trackers, right? For example VT, BLV, TLT, EEM, etc.
Is this automatic? Does the SIPP administrator place a request for 0% withholding and make sure it's applied?
TedSwippet wrote:
Thu Mar 01, 2018 4:23 pm
But... in practical terms, the new EU MiFID II and PRIIPS regulations now make it extremely hard to access US domiciled ETFs from UK brokers and platforms, including pensions. So even where there is a potential benefit to the UK investor in holding a US domiciled ETF, it might be impossible for many (if not all) investors to achieve it.
Can you expand on these regulations please? I haven't seen any issue accessing US ETFs from my IB account.

TedSwippet
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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Fri Mar 02, 2018 7:18 am

stressed wrote:
Fri Mar 02, 2018 6:14 am
I agree, this is true for the typical UK retain brokerages. When one uses an Interactive Brokers account though, investing in any exchange is equally easy, fx conversion is very easy and practically free, and trading fees in US exchanges are a tiny fraction of what they are for European ones. So transaction cots further tilt the scale in favour of US listed ETFs. Am I missing something?
Probably not. I don't know the fees scale or forex rates for Interactive Brokers, but if you have found that they are skimpy enough to leave a remaining (tiny?) edge for US domiciled ETFs in some circumstances, then that may well be the case.

Interactive Brokers don't offer ISAs though, and these should be the first port of call for most UK investors beyond pensions. They do offer SIPPs, but the benefit of US domiciled ETFs in pensions can be accessed through several standard UK retail platforms as well, at least to the extent that it is accessible at all under PRIIPS.
TedSwippet wrote:
Thu Mar 01, 2018 4:23 pm
Very interesting. I need to move my pension to a SIPP and convert the funds to US trackers. Presumably that would apply to all US trackers including bond and international stock trackers, right? For example VT, BLV, TLT, EEM, etc.
Is this automatic? Does the SIPP administrator place a request for 0% withholding and make sure it's applied?
It is not automatic. The pension administrator has to request this 0% rate from the US, so you would need to ensure that you find a SIPP provider that does this, and then provide them with the appropriate paperwork to claim that rate. If the pension provider does not offer this feature there is nothing you can do as an individual to get the 0% withholding or to recover any effective over-withholding.

Hargreaves Lansdown claim this feature, but see below for why this claim may not be useful.

It should apply to all US domiciled ETFs. The general rule is that a US domiciled ETF is treated as if it were just another US stock. The major benefit however is for where US domiciled ETFs hold US stocks, since here the dividends should flow from the underlying US stock to the SIPP without any tax drag anywhere. Where the ETF holds non-US stocks, it may suffer dividend tax withholding applied by the stock's own country of origin before the dividend is paid to the 'foreign' ETF. For non-US underlying stocks, the result is likely to be no different to an Ireland domiciled ETF.

So, a possible dividend tax benefit for VT because its holdings are approximately half US stocks, but probably no discernible dividend tax benefit for EEM because its holdings are all non-US stocks.
TedSwippet wrote:
Thu Mar 01, 2018 4:23 pm
Can you expand on these regulations please? I haven't seen any issue accessing US ETFs from my IB account.
This Reuters report gives a reasonable overview:
Hargreaves Lansdown, Britain’s biggest online investment platform, said it had suspended around 1,200 ETFs and 300 investment trusts from its website on Tuesday as they had not supplied the correct KIDs in time. That equates to about a third of ETFs and just under a half of trusts on the platform.

The funds remain on the platform, but are not visible on the website and the company said it would not accept any fresh money from either new or existing clients into the funds.

Around 900 of the ETFs are U.S.-based and Hargreaves spokesman Danny Cox said he did not expect them to ever provide the correct KIDs. The other 300 are Europe-based and would likely provide them over time.
Because Interactive Brokers are not based in the EU it is possible that they are immune from this EU regulation. Or maybe they just haven't yet got round to implementing it. You should probably ask them directly. The current situation is best described as 'fluid'.

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stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Fri Mar 02, 2018 9:59 am

Thanks, that's very useful.
IB doesn't seem to have any such issue (I have traded on two US ETFs on February). Their FX charges fyi are as good as it gets. You practically trade at mid market rates (bid-offer spread are <1pip) with a flat commission of $2.
TedSwippet wrote:
Fri Mar 02, 2018 7:18 am
So, a possible dividend tax benefit for VT because its holdings are approximately half US stocks, but probably no discernible dividend tax benefit for EEM because its holdings are all non-US stocks.
No benefit but no disadvantage either, right?

TedSwippet
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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Fri Mar 02, 2018 11:33 am

stressed wrote:
Fri Mar 02, 2018 9:59 am
No benefit but no disadvantage either, right?
None that I can think of, providing you can sidestep or are otherwise immune to US estate taxes.

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stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Fri Mar 09, 2018 4:15 pm

TedSwippet wrote:
Fri Mar 02, 2018 11:33 am
stressed wrote:
Fri Mar 02, 2018 9:59 am
No benefit but no disadvantage either, right?
None that I can think of, providing you can sidestep or are otherwise immune to US estate taxes.
This article here says that thanks to the US/UK tax treaty UK residents enjoy the same nil band rate as US citizens and therefore are only taxed for US estates larger than $5.5m (of course UK IHT kicks in earlier than that), so am I wrong to assume that US estate tax is a non issue for UK tax residents and the advice given in these forums to avoid US registered ETFs is wrong for UK people?

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Epsilon Delta
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Re: UK resident non-dom: what's best investment location?

Post by Epsilon Delta » Fri Mar 09, 2018 4:26 pm

stressed wrote:
Fri Mar 09, 2018 4:15 pm
TedSwippet wrote:
Fri Mar 02, 2018 11:33 am
stressed wrote:
Fri Mar 02, 2018 9:59 am
No benefit but no disadvantage either, right?
None that I can think of, providing you can sidestep or are otherwise immune to US estate taxes.
This article here says that thanks to the US/UK tax treaty UK residents enjoy the same nil band rate as US citizens and therefore are only taxed for US estates larger than $5.5m (of course UK IHT kicks in earlier than that), so am I wrong to assume that US estate tax is a non issue for UK tax residents and the advice given in these forums to avoid US registered ETFs is wrong for UK people?
That article begins "Individuals domiciled in the UK" then it segues to "residents of the UK". These are not the same thing. If you are a "UK resident non-dom" you are by definition not domiciled in the UK, but are a UK resident. You'd at least need to read the tax treaty very carefully. I suspect you'd really need a treaty between the US and where ever you are domiciled.

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stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Sat Mar 10, 2018 10:47 am

Yes but once a non-domiciled has been in the UK for 15 years (it used to be 17) they are deemed UK domiciled for IHT purposes. The US/UK tax treaty on the IHT part considers this deemed domicile status.
I still haven't been in the UK for 15 years so it doesn't yet apply in my case but it will very soon.
But my question here was more general, about the vast majority of UK tax residents that are also UK domiciled. Why is the conventional wisdom to avoid US domiciled assets if one is covered by the tax treaty and they won't end up paying any more anyway? (unless it's for patriotic reasons, i.e. to leave more money to HMRC as opposed to the IRS! :mrgreen: )

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Sat Mar 10, 2018 1:36 pm

stressed wrote:
Sat Mar 10, 2018 10:47 am
But my question here was more general, about the vast majority of UK tax residents that are also UK domiciled. Why is the conventional wisdom to avoid US domiciled assets if one is covered by the tax treaty and they won't end up paying any more anyway?
It is?

Because I neither get nor promote that impression for UK residents and people domiciled in the UK, and I do not see anyone else doing so either. Except perhaps to the extent that US domiciled ETFs can cause local (that is, UK) tax problems for UK residents even where there are no US estate tax issues.

We have two wiki pages on non-US domiciles. The first covers the basics of US tax for non-resident aliens, and includes a link to the IRS page on US estate taxes. (Well, it did until the IRS moved all of their web pages around and broke the wiki links. Sigh. I will fix this shortly.)

The second details the use of Ireland domiciled ETFs for residents of countries that do not have income tax and estate tax treaties with the US. It is worth noting that while the US income tax treaty network is relatively extensive, there are not all that many countries that have a usable US estate tax treaty.

I count seventeen functional estate tax treaties, meaning that residents of around 180 other countries -- the majority of the world's non-US population -- would generally want to avoid US domiciled ETFs. More often that not, non-US residents asking about holding market tracker funds and ETFs on this site are from (and domiciled in) countries that lack a US estate tax treaty. And some of these estate tax treaties are probably 'leaky'; for example, there are questions over whether or not the level of protection provided by the US/Ireland estate tax treaty increases the standard $60k non-resident alien exemption at all.

The 'conventional wisdom' for people outside US estate tax countries is to avoid US domiciled ETFs, simply because not doing so invites rapacious US estate taxes that are readily avoidable. For the select few domiciled in US estate tax countries, the decision is more nuanced.

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Re: UK resident non-dom: what's best investment location?

Post by Hyperborea » Sat Mar 10, 2018 4:03 pm

TedSwippet wrote:
Sat Mar 10, 2018 1:36 pm
The 'conventional wisdom' for people outside US estate tax countries is to avoid US domiciled ETFs, simply because not doing so invites rapacious US estate taxes that are readily avoidable. For the select few domiciled in US estate tax countries, the decision is more nuanced.
I think there's another aspect to it as well. If, in the future, you change from a country with an estate tax treaty with the US to one without then you may want to sell those US domiciled ETFs to avoid the US estate taxes at that time. But, the selling of those ETFs will bring a possibly large amount of capital gains taxes when all you are doing is transferring from one ETF in the US to a similar ETF domiciled outside the US. There are some opportunities to wash the capital gains tax but not always.* You may not have such an opportunity or not without serious contortions to make it happen. If one is ever planning to move countries (at retirement, after your current job assignment, etc.) then think about it long term.


* I am moving from the US where I hold US domiciled funds and ETFs. I will move to Japan for a number of years. Japan has an estate tax treaty but it also has a provision for assets kept outside the country for up to 5 years to be non-taxed. I will use that 5 year window to sell off all the US domiciled assets and buy Irish domiciled ones. At some point I will be leaving Japan to live elsewhere that doesn't have a US estate tax treaty. If I didn't do the conversion at the time when I can do it capital gains tax free then it would be very expensive to do so. As a resident of the US, I had no choice but to buy US domiciled assets despite my future plans because of other US laws that make it difficult and expensive to not hold US domiciled assets.
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Sun Mar 11, 2018 10:53 am

TedSwippet wrote:
Sat Mar 10, 2018 1:36 pm
The 'conventional wisdom' for people outside US estate tax countries is to avoid US domiciled ETFs, simply because not doing so invites rapacious US estate taxes that are readily avoidable. For the select few domiciled in US estate tax countries, the decision is more nuanced.
Alright, that makes perfect sense. I was probably projecting from reading various discussions referring to non-US people without explicitly excluding treaty countries such as the UK. My bad then.
Hyperborea wrote:
Sat Mar 10, 2018 4:03 pm
I think there's another aspect to it as well. If, in the future, you change from a country with an estate tax treaty with the US to one without then you may want to sell those US domiciled ETFs to avoid the US estate taxes at that time. But, the selling of those ETFs will bring a possibly large amount of capital gains taxes when all you are doing is transferring from one ETF in the US to a similar ETF domiciled outside the US. There are some opportunities to wash the capital gains tax but not always.* You may not have such an opportunity or not without serious contortions to make it happen. If one is ever planning to move countries (at retirement, after your current job assignment, etc.) then think about it long term.

* I am moving from the US where I hold US domiciled funds and ETFs. I will move to Japan for a number of years. Japan has an estate tax treaty but it also has a provision for assets kept outside the country for up to 5 years to be non-taxed. I will use that 5 year window to sell off all the US domiciled assets and buy Irish domiciled ones. At some point I will be leaving Japan to live elsewhere that doesn't have a US estate tax treaty. If I didn't do the conversion at the time when I can do it capital gains tax free then it would be very expensive to do so. As a resident of the US, I had no choice but to buy US domiciled assets despite my future plans because of other US laws that make it difficult and expensive to not hold US domiciled assets.
Very interesting, and a very important point indeed. It does actually apply to me as well, albeit probably not at least 20 years, when I will most likely have left the UK and lost UK tax domicile status. Although the counterargument may be that a certain cost advantage for the next 20 years may outweight an uncertain IHT benefit in an even larger timeframe (as rates and treaties will have changed by then or opportunities such as the Japan one in your case can be found to circumvent the CGT charge while switching to Irish funds in the future).

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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Sun Mar 11, 2018 11:45 am

stressed wrote:
Sun Mar 11, 2018 10:53 am
. It does actually apply to me as well, albeit probably not at least 20 years, when I will most likely have left the UK and lost UK tax domicile status.
Sorry to harp on this, maybe I don't understand your situation properly.

But if you are UK tax domiciled, you pay your tax on your global income, full stop. I believe.

That is, you have to avoid non Reporting (non Distributor) funds such as US funds like the plague. Got caught that way once, and had 100% of capital gains treated as income tax by HMRC. Ouch.

You only avoid this situation if you are Resident but non-domiciled.

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Re: UK resident non-dom: what's best investment location?

Post by Epsilon Delta » Sun Mar 11, 2018 2:06 pm

I think it bears repeating that these situations specific to the countries involved and often the facts of the people involved. General advice must be considered more as a "what to look for" than a "what to do".

Most people will spend their entire life domiciled in a single country. There is usually lots of advice for them in their home countries media. Quite a lot of the rest are a member of some particular group such as IBM executives or EU bureaucrats that share similar characteristics and can share advice with that community. But once you get to people who move between three or four countries on their own you are often find that the fact pattern only applies to a handful of individuals and you need to work it out for yourself.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Mon Mar 12, 2018 2:40 pm

Valuethinker wrote:
Sun Mar 11, 2018 11:45 am
stressed wrote:
Sun Mar 11, 2018 10:53 am
. It does actually apply to me as well, albeit probably not at least 20 years, when I will most likely have left the UK and lost UK tax domicile status.
Sorry to harp on this, maybe I don't understand your situation properly.

But if you are UK tax domiciled, you pay your tax on your global income, full stop. I believe.

That is, you have to avoid non Reporting (non Distributor) funds such as US funds like the plague. Got caught that way once, and had 100% of capital gains treated as income tax by HMRC. Ouch.

You only avoid this situation if you are Resident but non-domiciled.
I am not UK domiciled, but I have been a UK tax resident for long enough to start losing the advantages of my non-domiciled status. Once I've been in the UK for 15 years I will have exactly the same taxation as a UK domiciled individual. Upon retirement when I expect to move out of the UK for good, this changes - I will not be taxed in my non-UK income/gains any more.
Epsilon Delta wrote:
Sun Mar 11, 2018 2:06 pm
I think it bears repeating that these situations specific to the countries involved and often the facts of the people involved. General advice must be considered more as a "what to look for" than a "what to do".

Most people will spend their entire life domiciled in a single country. There is usually lots of advice for them in their home countries media. Quite a lot of the rest are a member of some particular group such as IBM executives or EU bureaucrats that share similar characteristics and can share advice with that community. But once you get to people who move between three or four countries on their own you are often find that the fact pattern only applies to a handful of individuals and you need to work it out for yourself.
Quite.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Wed Mar 14, 2018 10:51 am

[I realize I didn't mention that my wife is American, if it makes any difference.]

I'm now leaning to the following setup for the different accounts we hold in order to navigate as best as possible the minefield of tax traps from either side of the Atlantic:

- my SIPP (with IB): US funds with mostly US assets (VTI, VOO, BLV, AGG)
- my ISA: LSE listed ETFs, mostly non-US assets (VWRL, VFEM, VEUR, SWDA, VEVE, EMIM, VUTY)
- my IB taxable account: Irish/Luxemburg ETFs, mostly non-US (IWDA, VEVE, EMIM, SPPX)
- my wife's SIPP (with x-o): LSE listed funds (VWRL, VFEM, VEUR, SWDA, VEVE, EMIM, VUTY)
- my wife's IB taxable account: US funds with UK reporting status (VT, VTI, VWO, AGG, BND, BLV)

Does that sound about right?

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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Thu Mar 15, 2018 3:44 am

stressed wrote:
Wed Mar 14, 2018 10:51 am
[I realize I didn't mention that my wife is American, if it makes any difference.]

I'm now leaning to the following setup for the different accounts we hold in order to navigate as best as possible the minefield of tax traps from either side of the Atlantic:

- my SIPP (with IB): US funds with mostly US assets (VTI, VOO, BLV, AGG)
- my ISA: LSE listed ETFs, mostly non-US assets (VWRL, VFEM, VEUR, SWDA, VEVE, EMIM, VUTY)
- my IB taxable account: Irish/Luxemburg ETFs, mostly non-US (IWDA, VEVE, EMIM, SPPX)
- my wife's SIPP (with x-o): LSE listed funds (VWRL, VFEM, VEUR, SWDA, VEVE, EMIM, VUTY)
- my wife's IB taxable account: US funds with UK reporting status (VT, VTI, VWO, AGG, BND, BLV)

Does that sound about right?
Due to MIFID II you may have trouble accessing US funds?

Your wife is obligated to report to US tax authorities, and potentially to pay US tax. (our old friend FATCA comes in). Can she have a UK pension and is there any advantage under those circumstances?

The tax advantages for you of contributing to a SIPP may not outweigh the tax cost of getting your money out (when you are 55 or older). Don't expect that tax free lump sum of 25% to stick around forever.

The usual reason to do a pension in the UK is the employer match. That's worth having particularly if they also do salary surrender. Then, you contribute £1.00 which costs you 60p after higher rate tax, and £2.00 + 13.8p (your employer's National Insurance contribution) goes into the fund.

If you don't have the employer match is a SIPP worth it? Or is this just a transfer of existing funds?

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 4:22 am

Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
Due to MIFID II you may have trouble accessing US funds?
MiFID II has apparently pushed US domiciled ETFs out of reach for EU investors at many UK and EU brokers. However, so far at least, IB are reported to being either a) ignoring it, b) unaware of it, or c) of the (perhaps correct?) belief that it does not apply to them. So that's a valid route to buying and holding these ETFs, for now anyway.
Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
Your wife is obligated to report to US tax authorities, and potentially to pay US tax. (our old friend FATCA comes in). Can she have a UK pension and is there any advantage under those circumstances?
The US/UK tax treaty protects pensions relatively well. There are several gotcha's for US citizens under it, though.

The maximum a US citizen can save in a UK pension is the (lower) US annual maximum for saving into a pension and not the UK one. There are some potentially fiddly rules about what proportion of the pension can be personal contributions and what employer contribution (and where 'salary sacrifice' applies, only a philosopher can make the distinction!). And while experts cannot agree on whether a SIPP specifically is really covered by the detail of the treaty, it is reasonably clear that the spirit of the treaty is supposed to include all pensions.

Worth noting that claiming treaty relief on a UK pension is elective. However, not electing it exposes the entire pension to annual US tax and a mountain of horrible US reporting forms (PFIC, 3520, 3520-A and so on). There can however be some tax arbitrage opportunities with this where the plan is to draw on the pension while living in the US.
stressed wrote:
Wed Mar 14, 2018 10:51 am
I realize I didn't mention that my wife is American, if it makes any difference.
Then you need to watch out for US estate and gift taxes between you, because there is no unlimited marital exemption for assets passing to a non-US spouse. Also consider holding any home you own in only your name to prevent any possibility of US capital gains tax applying when the property is sold. I assume your wife already file US taxes as 'married filing separately' to keep all your finances well clear of interference from the IRS.
stressed wrote:
Wed Mar 14, 2018 10:51 am
- my wife's SIPP (with x-o): LSE listed funds (VWRL, VFEM, VEUR, SWDA, VEVE, EMIM, VUTY)
Any particular reason why your wife does not also use an IB SIPP? The small gain you get from the 0% withholding under the treaty on dividends from US stocks in pensions should apply equally to her as to you, I think. I imagine an IB SIPP would also be slightly more internationally portable than one from x-o, though this is really just speculation on my part.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Thu Mar 15, 2018 6:13 am

Thanks for your responses.
Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
The tax advantages for you of contributing to a SIPP may not outweigh the tax cost of getting your money out (when you are 55 or older). Don't expect that tax free lump sum of 25% to stick around forever.

The usual reason to do a pension in the UK is the employer match. That's worth having particularly if they also do salary surrender. Then, you contribute £1.00 which costs you 60p after higher rate tax, and £2.00 + 13.8p (your employer's National Insurance contribution) goes into the fund.

If you don't have the employer match is a SIPP worth it? Or is this just a transfer of existing funds?
At the moment is transferring of existing funds, but IMHO there are still advantages on contributing to a pension even without the lump sum.
a) Deferring tax, which will probably mean instead of paying tax at 47% (incl NI), I'll pay basic rate (20%) when I withdraw
b) IHT protection if I die young
TedSwippet wrote:
Thu Mar 15, 2018 4:22 am
Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
Due to MIFID II you may have trouble accessing US funds?
MiFID II has apparently pushed US domiciled ETFs out of reach for EU investors at many UK and EU brokers. However, so far at least, IB are reported to being either a) ignoring it, b) unaware of it, or c) of the (perhaps correct?) belief that it does not apply to them. So that's a valid route to buying and holding these ETFs, for now anyway.
Indeed. I seriously doubt it's either (a) or (b). I don't think IB is the only broker that allows US access. My guess is that some (most?) other brokers haven't done the necessary paperwork or deemed it wasn't worth it.
Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
Your wife is obligated to report to US tax authorities, and potentially to pay US tax. (our old friend FATCA comes in). Can she have a UK pension and is there any advantage under those circumstances?
I'm pretty sure she can, but there may be US tax traps that we are unaware of.
TedSwippet wrote:
Thu Mar 15, 2018 4:22 am
Valuethinker wrote:
Thu Mar 15, 2018 3:44 am
Your wife is obligated to report to US tax authorities, and potentially to pay US tax. (our old friend FATCA comes in). Can she have a UK pension and is there any advantage under those circumstances?
The US/UK tax treaty protects pensions relatively well. There are several gotcha's for US citizens under it, though.

The maximum a US citizen can save in a UK pension is the (lower) US annual maximum for saving into a pension and not the UK one. There are some potentially fiddly rules about what proportion of the pension can be personal contributions and what employer contribution (and where 'salary sacrifice' applies, only a philosopher can make the distinction!). And while experts cannot agree on whether a SIPP specifically is really covered by the detail of the treaty, it is reasonably clear that the spirit of the treaty is supposed to include all pensions.

Worth noting that claiming treaty relief on a UK pension is elective. However, not electing it exposes the entire pension to annual US tax and a mountain of horrible US reporting forms (PFIC, 3520, 3520-A and so on). There can however be some tax arbitrage opportunities with this where the plan is to draw on the pension while living in the US.
Can you please point to some info on these points?
What happens if one exceeds the annual US limits but is still within the UK ones? Should they declare the amount over the limit as taxable income then? And if this still doesn't lead to any tax in the US (given the higher tax rate in the UK and the additional allowance for non-residents), is it all clear?
Also worrying is what you mention about personal vs employer contributions, do you have a link for this? I remember reading a discussion in another forum of US expats where experts disagreed on this, and the impression I got was that it doesn't matter and people who advocated the worst possible interpretation of rules were a bit paranoid. But maybe that's naive. :|

TedSwippet wrote:
Thu Mar 15, 2018 4:22 am
Then you need to watch out for US estate and gift taxes between you, because there is no unlimited marital exemption for assets passing to a non-US spouse. Also consider holding any home you own in only your name to prevent any possibility of US capital gains tax applying when the property is sold. I assume your wife already file US taxes as 'married filing separately' to keep all your finances well clear of interference from the IRS.
Yes, only $140k a year I think, right? I think we are safe, because more assets flow in the opposite direction :happy
The house is jointly owned which is a better arrangement while we still own it and live in it. If we were to sell it now it would actually trigger capital losses (in USD) but certainly something to be aware in the future. Is it possible to gift fraction of one's share of the house (to be under the $140k annual limit) without triggering any taxes like stamp duty or anything else?
And yes, she is filing as married filing separately (and I'm not filing at all)
TedSwippet wrote:
Thu Mar 15, 2018 4:22 am
Any particular reason why your wife does not also use an IB SIPP? The small gain you get from the 0% withholding under the treaty on dividends from US stocks in pensions should apply equally to her as to you, I think. I imagine an IB SIPP would also be slightly more internationally portable than one from x-o, though this is really just speculation on my part.
I agree on all points, I wish IB allowed US citizens to open a SIPP but alas they don't! :(
Hence we went with x-o that seems to be the cheapest. Her pension is about half of mine so I guess we'll just keep non-US stuff in hers and all the US stuff in mine. Reverse home bias :happy

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 7:16 am

stressed wrote:
Thu Mar 15, 2018 6:13 am
Can you please point to some info on these points? What happens if one exceeds the annual US limits but is still within the UK ones? Should they declare the amount over the limit as taxable income then? And if this still doesn't lead to any tax in the US (given the higher tax rate in the UK and the additional allowance for non-residents), is it all clear?
Details on this limitation are in Article 18 paragraph 5(b) of the US/UK treaty. The Technical Explanation gives a better description of the situation:
The U.S. tax benefit allowed by paragraph 5, however, is limited to the lesser of the amount of relief allowed for contributions and benefits under a pension scheme established in the United Kingdom and, under subparagraph (b), the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension scheme established in the United States.
This may also raise the spectre of 'highly compensated employee' (HCE) limitations on top, but this is far beyond my area of knowledge.

I don't know how one would handle pension over-contributions on a US tax return, since I have never had to tackle it. I have no doubt that it will trigger a mountain of horrible paperwork, though. Probably annually and forever.
stressed wrote:
Thu Mar 15, 2018 6:13 am
Also worrying is what you mention about personal vs employer contributions, do you have a link for this? I remember reading a discussion in another forum of US expats where experts disagreed on this, and the impression I got was that it doesn't matter and people who advocated the worst possible interpretation of rules were a bit paranoid. But maybe that's naive.
Only the same discussions in other forums that you will have read, and perhaps a few assorted articles from companies claiming to be US tax specialists for expats. IIRC it is all to do with deciding whether or not a given UK pension contributed to by a US citizen qualifies for any treaty relief at all.

I got the same impression as you, that this is the most 'conservative' interpretation of the treaty (where 'conservative' here means butt-covering for the tax preparer concerned, and consequently tax-maximising for the IRS). But who knows. The IRS never says one way or another. Shrug.
stressed wrote:
Thu Mar 15, 2018 6:13 am
The house is jointly owned which is a better arrangement while we still own it and live in it. If we were to sell it now it would actually trigger capital losses (in USD) but certainly something to be aware in the future. Is it possible to gift fraction of one's share of the house (to be under the $140k annual limit) without triggering any taxes like stamp duty or anything else?
That looks like it might be possible, I think. I once 'gifted' half my house to my wife while we were both US residents but not US citizens. From discussions with our accountant, the 'gift' here didn't need to be anything more than an emailed promise to my wife. No idea how accurate that guidance was, and in the event we didn't need that gift for tax purposes anyway, so treat that as anecdote rather than fact.
stressed wrote:
Thu Mar 15, 2018 6:13 am
I agree on all points, I wish IB allowed US citizens to open a SIPP but alas they don't!
Might be FATCA. Might be policy.

I assume you have looked into ISAs for your wife? The benefits would be eroded by her citizenship -- no UK tax, but the US would tax it in full. However, the US tax rates here might be lower than the UK ones for her, depending on a heap of other factors of course. And she would have to take care to only hold US domiciled ETFs in the ISA, and as we know this is now tricky thanks to MiFID II. And quite a few UK ISA providers will outright refuse accounts for US citizens anyway, again thanks to FATCA.

No wonder US citizenship renunciations among the US expat community continue to run at record levels.

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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Thu Mar 15, 2018 8:34 am

TedSwippet wrote:
Thu Mar 15, 2018 7:16 am


No wonder US citizenship renunciations among the US expat community continue to run at record levels.
Obligatory highly off-topic comments. ;-)

Like the record number of Brits applying for Irish citizenship, there might be other reasons ;-).

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 9:26 am

Valuethinker wrote:
Thu Mar 15, 2018 8:34 am
Like the record number of Brits applying for Irish citizenship, there might be other reasons.
Possibly. But the start of the exponential uptick in US citizenship renunciation numbers is contemporaneous with FATCA implementation. It is difficult to see that as coincidence.

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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Thu Mar 15, 2018 11:53 am

TedSwippet wrote:
Thu Mar 15, 2018 9:26 am
Valuethinker wrote:
Thu Mar 15, 2018 8:34 am
Like the record number of Brits applying for Irish citizenship, there might be other reasons.
Possibly. But the start of the exponential uptick in US citizenship renunciation numbers is contemporaneous with FATCA implementation. It is difficult to see that as coincidence.
;-) I was being a bit facetious and a bit political ;-).

I agree with you, it's FATCA. Lots of people avoiding tax, and now they are paying it.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Thu Mar 15, 2018 11:56 am

TedSwippet wrote:
Thu Mar 15, 2018 7:16 am
Details on this limitation are in Article 18 paragraph 5(b) of the US/UK treaty. The Technical Explanation gives a better description of the situation:
The U.S. tax benefit allowed by paragraph 5, however, is limited to the lesser of the amount of relief allowed for contributions and benefits under a pension scheme established in the United Kingdom and, under subparagraph (b), the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension scheme established in the United States.
This may also raise the spectre of 'highly compensated employee' (HCE) limitations on top, but this is far beyond my area of knowledge.

I don't know how one would handle pension over-contributions on a US tax return, since I have never had to tackle it. I have no doubt that it will trigger a mountain of horrible paperwork, though. Probably annually and forever.
The way I read it is that when you file your tax return, the gross income is the same, the reduction from pension contributions should be the lesser of the IRS maximum and the actual contributions, which means that if one exceeds the IRS maximum, the taxable income (gross minus deductions) is higher than what it would have been otherwise. However, given the Foreign Earned Income Exclusion, not to mention the higher tax rates in the UK anyway, there wouldn't be any tax due to Uncle Sam regardless (the over-contribution is not huge anyway).

Then for the subsequent income/gains within the wrapper, I believe/hope the following part from the same notes applies and provides relief:
Paragraph 1 is not subject to the saving clause of paragraph 4 of Article 1 (General
Scope) by reason of the exception in subparagraph 5(a) of Article 1. Accordingly, a U.S. citizen
who is a resident of the United Kingdom will not be subject to tax in the United States on the
earnings and accretions of a U.K. pension fund with respect to that U.S. citizen.
TedSwippet wrote:
Thu Mar 15, 2018 7:16 am
I assume you have looked into ISAs for your wife? The benefits would be eroded by her citizenship -- no UK tax, but the US would tax it in full. However, the US tax rates here might be lower than the UK ones for her, depending on a heap of other factors of course. And she would have to take care to only hold US domiciled ETFs in the ISA, and as we know this is now tricky thanks to MiFID II. And quite a few UK ISA providers will outright refuse accounts for US citizens anyway, again thanks to FATCA.

No wonder US citizenship renunciations among the US expat community continue to run at record levels.
Indeed, it seems ISAs are a no go area for US citizens. Most brokers don't even accept them. X-o for example won't accept US citizens for an ISA (but accepts for a SIPP! IB doesn't accept for a SIPP and doesn't offer ISAs at all).
However, we just opened a cash ISA for her actually. Might as well use her otherwise wasted allowance to park some of the cash savings without any UK tax liabilities on the interest. If I'm not mistaken, the little interest earned won't give rise to US tax liability either.

TedSwippet
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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 12:19 pm

Valuethinker wrote:
Thu Mar 15, 2018 11:53 am
I was being a bit facetious and a bit political.
Yeah, I know. It just seemed that my statement needed a bit of bolstering with some hyperlinks, and your comment was a handy place on which to hang them!
Valuethinker wrote:
Thu Mar 15, 2018 11:53 am
I agree with you, it's FATCA. Lots of people avoiding tax, and now they are paying it.
Well, yes and no. The vast majority of US citizens abroad are entirely compliant with their local tax laws, and also have zero tax liability to the US because of the FEIE and/or foreign tax credits. Whatever tax evasion exists will be mostly by US citizens living in the US. But because the US taxes on citizenship, US citizens living outside get roped in, and many are now excluded from local investments by banks that do not wish to engage with FATCA compliance due to huge costs and under threat of massive US penalties for mistakes. The analogy would be punishing an entire school class because of a single unruly pupil.

The ultimate insult to US citizens abroad -- in fact to everyone -- is that the money recovered by the US with FATCA from real tax evasion is considerably less than the overall cost of FATCA, making it all a negative-sum game. Well, for all except tax professionals, for whom FATCA is a goldmine.
Last edited by TedSwippet on Thu Mar 15, 2018 1:15 pm, edited 1 time in total.

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 1:14 pm

stressed wrote:
Thu Mar 15, 2018 11:56 am
The way I read it is that when you file your tax return, the gross income is the same, the reduction from pension contributions should be the lesser of the IRS maximum and the actual contributions, which means that if one exceeds the IRS maximum, the taxable income (gross minus deductions) is higher than what it would have been otherwise. However, given the Foreign Earned Income Exclusion, not to mention the higher tax rates in the UK anyway, there wouldn't be any tax due to Uncle Sam regardless (the over-contribution is not huge anyway).
The (perceived, sometimes!) higher UK tax rates won't come into things because there is no UK tax on pension contributions. The FEIE might help, though. I guess a lot depends on circumstances and other income.

If it does, then it seems like it could be useful to elect the contributions above the IRS maximum to be outside the treaty. The paperwork for this is huge, horrible, and annual, but the result can be that you build up a pension that is broadly free of UK tax when drawn. Of most use if you plan to retire in the US, but could be useful in other circumstances. I can't see a route to electing a part of a pension out of the treaty, so probably only doable by holding two pensions and saving the over-contributions into the one that is elected out. And dealing with the PFIC issues.

Again though, I'm speculating a fair bit here. Good luck getting the details fully ironed out.
stressed wrote:
Thu Mar 15, 2018 11:56 am
Then for the subsequent income/gains within the wrapper, I believe/hope the following part from the same notes applies and provides relief...
Should be okay. No US tax until withdrawals on pensions elected into the treaty.
stressed wrote:
Thu Mar 15, 2018 11:56 am
However, we just opened a cash ISA for her actually. Might as well use her otherwise wasted allowance to park some of the cash savings without any UK tax liabilities on the interest. If I'm not mistaken, the little interest earned won't give rise to US tax liability either.
By 'wasted allowance' I presume you mean the US standard deduction rather than UK tax-free allowance? Remember that the FEIE only applies to earned income. Interest, dividends, capital gains and so on can get US tax mitigation only from foreign tax credits. And where the non-US country does not tax something, there is no foreign tax to credit. The US looks straight through an ISA as if it were not there.

This foreign tax credit constraint is how sale of a UK home can get you into trouble. The UK never taxes sale of primary residence. The US will if gains are high enough or if you haven't lived in it for some minimum number of years. And then there is the potential for US tax on retiring a non-US mortgage. It's all like a rat-hole with no bottom to it.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Thu Mar 15, 2018 4:57 pm

TedSwippet wrote:
Thu Mar 15, 2018 1:14 pm
The (perceived, sometimes!) higher UK tax rates won't come into things because there is no UK tax on pension contributions. The FEIE might help, though. I guess a lot depends on circumstances and other income.

If it does, then it seems like it could be useful to elect the contributions above the IRS maximum to be outside the treaty. The paperwork for this is huge, horrible, and annual, but the result can be that you build up a pension that is broadly free of UK tax when drawn. Of most use if you plan to retire in the US, but could be useful in other circumstances. I can't see a route to electing a part of a pension out of the treaty, so probably only doable by holding two pensions and saving the over-contributions into the one that is elected out. And dealing with the PFIC issues.
I don't understand how the second pension would be free of UK tax when drawn. It has benefited from UK income tax relief when initially contributed, and sits in a UK pension wrapper, so presumably all UK rules still apply to it, no?
In any case, the idea of additional paperwork every year makes it a non-starter!
Regarding the taxation of over contributions I was thinking the following (roughly):

UK gross income: £140k
pension contributions: £40k
UK taxable income: £100k
UK tax paid: £30k

US tax return: (assume FX rate £1=$1.50)
gross income: $210k
pension contributions: $20k (the rest don't get relief)
taxable income: $190k
US federal tax due: $40k
minus Foreign Tax Credit of $45k
Resulting US tax due: nil

TedSwippet wrote:
Thu Mar 15, 2018 1:14 pm
By 'wasted allowance' I presume you mean the US standard deduction rather than UK tax-free allowance? Remember that the FEIE only applies to earned income. Interest, dividends, capital gains and so on can get US tax mitigation only from foreign tax credits. And where the non-US country does not tax something, there is no foreign tax to credit. The US looks straight through an ISA as if it were not there.

This foreign tax credit constraint is how sale of a UK home can get you into trouble. The UK never taxes sale of primary residence. The US will if gains are high enough or if you haven't lived in it for some minimum number of years. And then there is the potential for US tax on retiring a non-US mortgage. It's all like a rat-hole with no bottom to it.
No, I meant the ISA annual allowance. I was thinking it's worth putting cash that earns pitiful interest especially after tax into an ISA tax wrapper for my wife (I already use my ISA allowance). In the cash ISA it will still earn pitiful interest but at least tax free in the UK (automatically) and in the US (after the Foreign Tax Credit), and it will be inside a wrapper that may prove useful in the future.
My assumption is that the Foreign Tax Credit (which becomes larger every year) provides immunity from US taxes including interest, dividends, etc. (there's enough of a buffer as passive income is next to nothing compared to normally taxed active). Am I wrong?
It seems that the house is another chapter altogether. Luckily we don't anticipate moving or selling any time soon, so we'll hopefully have time to deal with it (and thankfully there's no paperwork involved in the meantime!). It seems that if we sell, it better be in a year that my wife has paid enough UK tax for the credit to offset any US CGT due, right?

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Thu Mar 15, 2018 5:43 pm

stressed wrote:
Thu Mar 15, 2018 4:57 pm
I don't understand how the second pension would be free of UK tax when drawn. It has benefited from UK income tax relief when initially contributed, and sits in a UK pension wrapper, so presumably all UK rules still apply to it, no?
Sometimes not.

Such a pension wouldn't be a pension as far as US tax is concerned. If you don't elect into the treaty it's just an ordinary trading account (hence the PFIC restriction). So under some circumstances it is possible to pay into it, pay no UK tax, and use up excess US foreign tax credits so that you have a US basis in it.

If you later move to the US you can then draw it largely tax-free. The US/UK tax treaty reserves taxing rights on pensions to the country of residence, so here the US. And the fact that is has a basis makes most of the withdrawals untaxed 'return of capital' to the US. The right-hand column of page 4 of this article outlines how that can work. It seems also like it might work if you move to any country where the treaty with the UK reserves taxing rights on pensions to the country of residence in the same was as the US/UK treaty does.

Whether this would work for you depends on your future plans.
stressed wrote:
Thu Mar 15, 2018 4:57 pm
In any case, the idea of additional paperwork every year makes it a non-starter!
Of course. Far from easy. The IRS would not have things any other way.
stressed wrote:
Thu Mar 15, 2018 4:57 pm
No, I meant the ISA annual allowance. I was thinking it's worth putting cash that earns pitiful interest especially after tax into an ISA tax wrapper for my wife (I already use my ISA allowance). In the cash ISA it will still earn pitiful interest but at least tax free in the UK (automatically) and in the US (after the Foreign Tax Credit), and it will be inside a wrapper that may prove useful in the future. My assumption is that the Foreign Tax Credit (which becomes larger every year) provides immunity from US taxes including interest, dividends, etc. (there's enough of a buffer as passive income is next to nothing compared to normally taxed active). Am I wrong?
I am not sure what you mean by "the Foreign Tax Credit (which becomes larger every year)".

The foreign tax credit is set simply by how much non-US tax you pay on a given category of income, and goes up, down, and sideways. The FEIE is a set amount that does tend to grow each year. Are you confusing the two? The FEIE covers only earned income, but foreign tax credits can be used for any income type. If you claim the FEIE you cannot also claim the foreign tax credit on the same income.

When claiming foreign tax credits you have to split your income into separate categories on form 1116, one of which is 'passive' income. You cannot get a US foreign tax credit for passive income based on excess credits for a higher tax you might have paid on active income. The IRS tries to explain in this publication.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Fri Mar 16, 2018 6:41 am

TedSwippet wrote:
Thu Mar 15, 2018 5:43 pm
Such a pension wouldn't be a pension as far as US tax is concerned. If you don't elect into the treaty it's just an ordinary trading account (hence the PFIC restriction). So under some circumstances it is possible to pay into it, pay no UK tax, and use up excess US foreign tax credits so that you have a US basis in it.

If you later move to the US you can then draw it largely tax-free. The US/UK tax treaty reserves taxing rights on pensions to the country of residence, so here the US. And the fact that is has a basis makes most of the withdrawals untaxed 'return of capital' to the US. The right-hand column of page 4 of this article outlines how that can work. It seems also like it might work if you move to any country where the treaty with the UK reserves taxing rights on pensions to the country of residence in the same was as the US/UK treaty does.

Whether this would work for you depends on your future plans.
It wouldn't be a pension as far as the US is concerned but it would still be one as far as the UK is, wouldn't it? Why would HMRC allow income/gains to accrue tax free if they have provided tax relief on initial contributions?

From the article you posted it seems the UK situation is better than most thanks to a relatively more comprehensive tax treaty. And it seems to confirm my thinking that whatever over-contributions one made will simply not get income tax relief in the US, but the Foreign Tax Credit should cover it resulting in no tax due. In a worst case scenario, the Foreign Tax Credit won't be enough, and there will be some US income tax due for the balance, correct? In any case my wife has submitted the past contributions (that are above the US limits) so we'll see what IRS comes back with.
TedSwippet wrote:
Thu Mar 15, 2018 5:43 pm
I am not sure what you mean by "the Foreign Tax Credit (which becomes larger every year)".

The foreign tax credit is set simply by how much non-US tax you pay on a given category of income, and goes up, down, and sideways. The FEIE is a set amount that does tend to grow each year. Are you confusing the two? The FEIE covers only earned income, but foreign tax credits can be used for any income type. If you claim the FEIE you cannot also claim the foreign tax credit on the same income.

When claiming foreign tax credits you have to split your income into separate categories on form 1116, one of which is 'passive' income. You cannot get a US foreign tax credit for passive income based on excess credits for a higher tax you might have paid on active income. The IRS tries to explain in this publication.
No, I mean FTC, not FEIE. I meant that her income and UK tax paid increases every year more than inflation (slightly). Moreover is not fully utilised, so there may be some carry forward accrual (I'm not 100% sure about that though).

I'm not sure I understand your last point. How does one reconcile the two parts in bold?

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Fri Mar 16, 2018 8:11 am

stressed wrote:
Fri Mar 16, 2018 6:41 am
It wouldn't be a pension as far as the US is concerned but it would still be one as far as the UK is, wouldn't it? Why would HMRC allow income/gains to accrue tax free if they have provided tax relief on initial contributions?
Because that is what the US/UK tax treaty says. Article 17 paragraph 1(a):
1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
There are several fiddly exceptions to this around (US) citizenship, lump sums and so on, but the basic rule is that a UK pension owned by a US resident is taxable only to the US. As put by the treaty technical explanation, "Paragraph 1 provides as a general rule, in subparagraph (a), that the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration."

Notice that this is symmetrical. I hold a US 401k plan from time spent working in the US. Its contributions were US tax relieved, but I will pay tax only to the UK on withdrawals under this treaty article. Treaties generally override domestic tax laws. For countries entering into such treaties, win some, lose some, then.

Where a pension saver can use up excess US foreign tax credits by saving into a UK pension and so establish a US 'tax basis' in this pension, there is the potential here for some tax arbitrage. It is not really "tax free", though. Rather, it is an effective prepayment of the US tax that will become due on withdrawals if made in the US. In this case, being satisfied by taking tax credits against US tax for higher non-US taxes.
stressed wrote:
Fri Mar 16, 2018 6:41 am
No, I mean FTC, not FEIE. I meant that her income and UK tax paid increases every year more than inflation (slightly). Moreover is not fully utilised, so there may be some carry forward accrual (I'm not 100% sure about that though).
Okay, if this works for you. Again though, note that foreign tax credit has to go into separate income baskets, with each handled separately. You can find that you have unused foreign tax credit for salary that you cannot use against a US tax bill for interest, because these are different baskets. This article explains.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Fri Mar 16, 2018 4:04 pm

TedSwippet wrote:
Fri Mar 16, 2018 8:11 am
stressed wrote:
Fri Mar 16, 2018 6:41 am
It wouldn't be a pension as far as the US is concerned but it would still be one as far as the UK is, wouldn't it? Why would HMRC allow income/gains to accrue tax free if they have provided tax relief on initial contributions?
Because that is what the US/UK tax treaty says. Article 17 paragraph 1(a):
1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
There are several fiddly exceptions to this around (US) citizenship, lump sums and so on, but the basic rule is that a UK pension owned by a US resident is taxable only to the US. As put by the treaty technical explanation, "Paragraph 1 provides as a general rule, in subparagraph (a), that the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration."

Notice that this is symmetrical. I hold a US 401k plan from time spent working in the US. Its contributions were US tax relieved, but I will pay tax only to the UK on withdrawals under this treaty article. Treaties generally override domestic tax laws. For countries entering into such treaties, win some, lose some, then.

Where a pension saver can use up excess US foreign tax credits by saving into a UK pension and so establish a US 'tax basis' in this pension, there is the potential here for some tax arbitrage. It is not really "tax free", though. Rather, it is an effective prepayment of the US tax that will become due on withdrawals if made in the US. In this case, being satisfied by taking tax credits against US tax for higher non-US taxes.
Oh, I see now. Very interesting. I guess this would apply even if she doesn't retire in the US but anywhere outside the UK as she would remain a US tax resident but not UK tax resident any more.
Not sure it's worth the complication, paperwork and hassle but good to know regardless.
TedSwippet wrote:
Fri Mar 16, 2018 8:11 am
Okay, if this works for you. Again though, note that foreign tax credit has to go into separate income baskets, with each handled separately. You can find that you have unused foreign tax credit for salary that you cannot use against a US tax bill for interest, because these are different baskets. This article explains.
I see. So far she has been declaring bank interest (taxable in the UK) in the active income bucket. This is what an accountant she had hired years ago did and she has been doing the same ever since. I assume it's because it was taxed at the same rate as income so it was justified to do it this way? (and it didn't give any benefit either way).
So I guess this changes in the case of an ISA as this is not taxed in the UK, so you can't put it in the same bucket? Or can it be claimed that bank interest is generally taxed the same as income in the UK (for an additional rate taxpayer) so she can still lump it with the non-ISA bank interest in the same income bucket?

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Fri Mar 16, 2018 5:17 pm

stressed wrote:
Fri Mar 16, 2018 4:04 pm
I guess this would apply even if she doesn't retire in the US but anywhere outside the UK as she would remain a US tax resident but not UK tax resident any more.
Not anywhere outside the UK. To avoid a UK tax liability on UK pension payments this would have to be in a country that has a tax treaty with the UK that reserves exclusive taxing rights on pension payments to the country of residence. I think there are a few other countries besides the US that fit this bill, but also a lot of countries that do not.

Outside of these countries your wife would not get much of the benefit from having prepaid US tax because she would still be liable to UK tax on UK pension withdrawals, and this UK tax could always be taken as a US foreign tax credit even without any effective prepayment through excess US foreign tax credits. Inside of them, she would need to be in a country whose local tax on foreign pensions is lower than her US rate to gain any benefit.

The cost of all of this is annual US tax on all the pension gains and an annual mountain of US paperwork for a foreign grantor trust. Potentially for most of her life, because apart from a few exceptions for things like terminal illness, UK pensions can never be drawn earlier than age 55 (likely soon to rise to 57 or older).
stressed wrote:
Fri Mar 16, 2018 4:04 pm
So far she has been declaring bank interest (taxable in the UK) in the active income bucket. This is what an accountant she had hired years ago did and she has been doing the same ever since. I assume it's because it was taxed at the same rate as income so it was justified to do it this way?
Not really. It is just plain wrong. The foreign tax credits baskets changed around a few years ago -- and now again somewhat in the TCJA -- but interest has always been 'passive' and so separate from salary.
stressed wrote:
Fri Mar 16, 2018 4:04 pm
So I guess this changes in the case of an ISA as this is not taxed in the UK, so you can't put it in the same bucket? Or can it be claimed that bank interest is generally taxed the same as income in the UK (for an additional rate taxpayer) so she can still lump it with the non-ISA bank interest in the same income bucket?
ISA interest is 'passive'. Non-ISA interest is also 'passive'. Neither should go into the same basket as salary, which is 'general'.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Sat Mar 17, 2018 5:28 am

It's funny how what I started as a quest for arranging investments in different accounts to optimise a few basis points has morphed into a deep dive into the US tax system. :shock:
TedSwippet wrote:
Fri Mar 16, 2018 5:17 pm
Not anywhere outside the UK. To avoid a UK tax liability on UK pension payments this would have to be in a country that has a tax treaty with the UK that reserves exclusive taxing rights on pension payments to the country of residence.
[...]
The cost of all of this is annual US tax on all the pension gains and an annual mountain of US paperwork for a foreign grantor trust.
I was thinking that she is always US tax resident, but if it has to be physical residence then fine.
In any case the paperwork/hassle cost makes it unworthy.
But just to be clear, this is an optional election. If she doesn't want to establish this cost basis and tax-prepayment, then the SIPP will remain a standard UK pension, requiring no additional US bound paperwork annually, and when it is in drawdown it will attract tax as per standard rules, right?
The question mainly refers to the over-payments. They may or may not give rise to US tax liability upfront (depending on whether the reduced tax credit because of higher UK tax relief in the year of increased contributions is enough given that the taxable income in the US will be higher by the amount of contributions above the US limit). But that's it. After that, the whole amount can stay in the SIPP until retirement, right?
TedSwippet wrote:
Fri Mar 16, 2018 5:17 pm
stressed wrote:
Fri Mar 16, 2018 4:04 pm
So far she has been declaring bank interest (taxable in the UK) in the active income bucket. This is what an accountant she had hired years ago did and she has been doing the same ever since. I assume it's because it was taxed at the same rate as income so it was justified to do it this way?
Not really. It is just plain wrong. The foreign tax credits baskets changed around a few years ago -- and now again somewhat in the TCJA -- but interest has always been 'passive' and so separate from salary.
stressed wrote:
Fri Mar 16, 2018 4:04 pm
So I guess this changes in the case of an ISA as this is not taxed in the UK, so you can't put it in the same bucket? Or can it be claimed that bank interest is generally taxed the same as income in the UK (for an additional rate taxpayer) so she can still lump it with the non-ISA bank interest in the same income bucket?
ISA interest is 'passive'. Non-ISA interest is also 'passive'. Neither should go into the same basket as salary, which is 'general'.
Wouldn't the interest been considered high-taxed income and therefore go in the general category income? I believe that's the rationale.
So far the IRS hasn't complained all these years. Perhaps because the amount of tax view would be the same anyway, as the few quid of bank interest has always been taxed here at marginal income tax rate.
With the ISA this would change of course, and it seems that she can't put it in the general category any more? (in which case it's not really worth it to open the account at all?)

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Sat Mar 17, 2018 6:00 am

stressed wrote:
Sat Mar 17, 2018 5:28 am
It's funny how what I started as a quest for arranging investments in different accounts to optimise a few basis points has morphed into a deep dive into the US tax system.
Most things do, eventually.
stressed wrote:
Sat Mar 17, 2018 5:28 am
I was thinking that she is always US tax resident, but if it has to be physical residence then fine.
She is always a US tax resident. Perhaps I was unclear. The best benefit of a prepayment of US tax on a UK pension, then, is if she is only a US tax resident when drawing the UK pension. If you both move to another country that is neither the UK nor the US then the benefit of doing this is variable, anywhere from nothing to as good as if you had moved to the US, depending on the tax rate(s) in the country you move to and the tax treaties (if any) between it and the UK and between it and the US.

The TL;DR here is that being a US citizen outside of the US is a financial nightmare for life.
stressed wrote:
Sat Mar 17, 2018 5:28 am
But just to be clear, this is an optional election. If she doesn't want to establish this cost basis and tax-prepayment, then the SIPP will remain a standard UK pension, requiring no additional US bound paperwork annually, and when it is in drawdown it will attract tax as per standard rules, right?
Right. Treaties are elective. There is never any compulsion to take a treaty stance if you can get a better result by not doing so. And as we've seen, some sources consider SIPPs not to be covered by treaty, so there's always that threat lurking in the wings. But generally, yes. Beware US annual 'information reporting' requirements on pensions, though.
stressed wrote:
Sat Mar 17, 2018 5:28 am
The question mainly refers to the over-payments. They may or may not give rise to US tax liability upfront (depending on whether the reduced tax credit because of higher UK tax relief in the year of increased contributions is enough given that the taxable income in the US will be higher by the amount of contributions above the US limit). But that's it. After that, the whole amount can stay in the SIPP until retirement, right?
I don't know on the overpayments part. Way past my paygrade. But on the latter, yes. If you treat the SIPP as is covered by the treaty then there is "nothing" to worry about with US tax. Well, nothing apart from US annual FinCEN 114 (FBAR) and FATCA 'information' reporting to consider until drawing it. Also potentially an annual form 8833 to claim treaty benefits. And, of course, any new nonsense that congress might dream up in the interim.
stressed wrote:
Fri Mar 16, 2018 4:04 pm
Wouldn't the interest been considered high-taxed income and therefore go in the general category income? I believe that's the rationale.
Oh, right -- perhaps. It's a fiddly determination with shifting UK rates on interest, the new interest tax-free allowance, and on and on and on. But then there's always the 'high tax kickout' to worry about too. ISAs clearly don't qualify as high-taxed income though.

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Re: UK resident non-dom: what's best investment location?

Post by stressed » Sun Mar 18, 2018 5:13 am

TedSwippet wrote:
Sat Mar 17, 2018 6:00 am
Right. Treaties are elective. There is never any compulsion to take a treaty stance if you can get a better result by not doing so. And as we've seen, some sources consider SIPPs not to be covered by treaty, so there's always that threat lurking in the wings. But generally, yes. Beware US annual 'information reporting' requirements on pensions, though.
stressed wrote:
Sat Mar 17, 2018 5:28 am
The question mainly refers to the over-payments. They may or may not give rise to US tax liability upfront (depending on whether the reduced tax credit because of higher UK tax relief in the year of increased contributions is enough given that the taxable income in the US will be higher by the amount of contributions above the US limit). But that's it. After that, the whole amount can stay in the SIPP until retirement, right?
I don't know on the overpayments part. Way past my paygrade. But on the latter, yes. If you treat the SIPP as is covered by the treaty then there is "nothing" to worry about with US tax. Well, nothing apart from US annual FinCEN 114 (FBAR) and FATCA 'information' reporting to consider until drawing it. Also potentially an annual form 8833 to claim treaty benefits. And, of course, any new nonsense that congress might dream up in the interim.
Ok, and by annual information reporting you refer to the forms in your second paragraph? In that case FBAR has been done, as well as 8833 (that's done only once for all accounts, not once per account, right?). What's the FATCA bit? Isn't that the one that the account provider should be doing?
Also, just to confirm, the fact that she is claiming treaty rights for the pension means that there's no PFIC issues, so she can hold EU domiciled ETFs inside the SIPP without worry?
TedSwippet wrote:
Sat Mar 17, 2018 6:00 am
ISAs clearly don't qualify as high-taxed income though.
So, in that case tax of 39.6% minus any passive income tax credits is due. Am I then right to think that there's still some benefit if there's enough UK taxable dividend income?
For example:
Dividends in taxable accounts: £5000
ISA interest: £1000
UK passive income tax = 45% * £3000 + 0% * £1000 = £1350 (first £2k of divs are not taxed, the rest are taxed at marginal rate)
US passive income tax = 15% * £5000 + 15% * £1000 = £900, therefore nothing due as there's more than that in passive income tax credit.

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Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Sun Mar 18, 2018 7:03 am

stressed wrote:
Sun Mar 18, 2018 5:13 am
Ok, and by annual information reporting you refer to the forms in your second paragraph? In that case FBAR has been done, as well as 8833 (that's done only once for all accounts, not once per account, right?). What's the FATCA bit? Isn't that the one that the account provider should be doing?
One form 8833 for each treaty position claimed.

If your wife has multiple pensions they can all go onto one 8833, since this is a single 'treaty-based return position'. If she is claiming other treaty benefits -- of which there are actually precious few for her because of the US's execrable treaty 'saving clause' -- she would need separate form 8833s for each treaty clause claimed. Unless exempted, and I have never been able to fully unravel the IRS's description of form 8833 exemptions. Chances are that the pension is the only one she gets, anyway.

The FATCA bit is form 8938 for individuals. It is mostly the same information that goes onto the FBAR (but the IRS's mission statement is apparently: why do something once when twice will suffice?). May or may not apply depending on asset levels.
stressed wrote:
Sun Mar 18, 2018 5:13 am
Also, just to confirm, the fact that she is claiming treaty rights for the pension means that there's no PFIC issues, so she can hold EU domiciled ETFs inside the SIPP without worry?
I believe so. See this from KPMG.
stressed wrote:
Sun Mar 18, 2018 5:13 am
So, in that case tax of 39.6% minus any passive income tax credits is due. Am I then right to think that there's still some benefit if there's enough UK taxable dividend income?
I don't intend to work through your numbers. I have never had to deal with this personally -- I was smart enough not to take out US citizenship when I had the opportunity -- so there may be some nuances I'm not aware of in here. At this stage you might want to think about taking the discussion somewhere like UK-Yankee.

But conceptually, yes, if your wife can lump all her ISA and non-ISA dividends and interest together into a single form 1116 foreign tax credit basket, it may well be that she can in effect use the 'excess' foreign tax credit from UK tax paid on the non-ISA amounts to entirely shield the ISA amounts from US tax through a US foreign tax credit.

Topic Author
stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Sun Mar 18, 2018 3:52 pm

TedSwippet wrote:
Sun Mar 18, 2018 7:03 am
stressed wrote:
Sun Mar 18, 2018 5:13 am
Ok, and by annual information reporting you refer to the forms in your second paragraph? In that case FBAR has been done, as well as 8833 (that's done only once for all accounts, not once per account, right?). What's the FATCA bit? Isn't that the one that the account provider should be doing?
One form 8833 for each treaty position claimed.

If your wife has multiple pensions they can all go onto one 8833, since this is a single 'treaty-based return position'. If she is claiming other treaty benefits -- of which there are actually precious few for her because of the US's execrable treaty 'saving clause' -- she would need separate form 8833s for each treaty clause claimed. Unless exempted, and I have never been able to fully unravel the IRS's description of form 8833 exemptions. Chances are that the pension is the only one she gets, anyway.

The FATCA bit is form 8938 for individuals. It is mostly the same information that goes onto the FBAR (but the IRS's mission statement is apparently: why do something once when twice will suffice?). May or may not apply depending on asset levels.
8833 she has been doing every year for her pension contributions.
8938 she hasn't. What are the consequences and can it be submitted belatedly for past years?
I told her to call the Embassy and ask for advice.

My -perhaps paranoid - concern is that somehow the SIPP loses pension treatment status and this leads to additional reporting requirements, restrictions on what can be invested in (PFIC for example) or taxes before withdrawals in retirement.

If the Embassy people don't help, I will check with the UK Yankee forum. Thanks for all your help!

TedSwippet
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Location: UK

Re: UK resident non-dom: what's best investment location?

Post by TedSwippet » Sun Mar 18, 2018 5:05 pm

stressed wrote:
Sun Mar 18, 2018 3:52 pm
8938 she hasn't. What are the consequences and can it be submitted belatedly for past years?
There is a potential $10k fine but omission would need to be wilful, so unlikely by the sound of things. To fix, file 1040X amended return(s) with the requisite 8938. Do be sure she needs to file it first though. The asset trigger for someone living outside the US is much higher than for US residents.
stressed wrote:
Sun Mar 18, 2018 3:52 pm
I told her to call the Embassy and ask for advice.
No point calling the US consulate. The IRS closed their London office in 2015. All part of their commitment to "improving customer service", apparently. You now have to phone (or fax!) the US directly for help.
stressed wrote:
Sun Mar 18, 2018 3:52 pm
My -perhaps paranoid - concern is that somehow the SIPP loses pension treatment status and this leads to additional reporting requirements, restrictions on what can be invested in (PFIC for example) or taxes before withdrawals in retirement.
I don't think so. As long as the requisite treaty claim was made with form 8833 I cannot see any way that some other missing part of the return could unravel that. Of course, this is the IRS so anything is possible, but personally I don't see it. Of more concern may be that a missing form 8938 does not start the clock running on the statute of limitations for a tax return, meaning that the IRS has a vastly enlarged audit window.

All this nonsense makes you truly grateful not to be a US citizen, doesn't it?

Topic Author
stressed
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Re: UK resident non-dom: what's best investment location?

Post by stressed » Wed Mar 21, 2018 4:41 pm

Absolutely!

Unfortunately my wife didn't have the foresight to avoid being born a US Citizen though, and little did I know when I met her that it would become a worry for me at some point!

Anyway, shortly after your last post, the response from the IRS for the 2016 tax return arrived. They didn't complain about the pension over-contributions per se, but asked for an AMT form to be submitted. This probably confirms my thought that pension over-contributions don't hurt, it's just that they don't attract US tax relief. Which may or may not result in actual US tax owned depending on how much Foreign Tax Credit there is. Anyway, my wife will submit the AMT form as well as the belated 8938 forms (the IRS told her to just send them now, no problem) and that will be the end of it (for now anyway).

Thanks again for your help!

christophe29
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Re: UK resident non-dom: what's best investment location?

Post by christophe29 » Fri Jun 15, 2018 8:47 am

Hello!

I hope you won't mind me piggyback riding on the back of this post, but my questions are directly related to a lot of things covered in this post, namely all the rules related to being a UK resident non-dom.

I moved to the UK a year ago and will soon be filing my first tax return. Given my large investments abroad, I plan on claiming the "remittance basis". All my investments were held abroad and made in non-UK securities, so I think I am all fine there. Now, however, I'm in the process of moving the investments to Saxo Bank (Netherlands based entity). My understanding is that since the entity is based in the Netherlands, all investments/securities will be held in the Netherlands as well, so no issues there either. However, the investment plan my advisor is suggesting includes direct exposure to the UK (for example, HSBC FTSE 100 UCITS ETF, or Vanguard FTSE 100 UCITS ETF).

Is it possible to have investments like this with UK exposure and not pay capital gains taxes on them under the "remittance basis" as long as the investment is held abroad and the gains don't enter the UK? Or would I have to pay taxes on these because there is UK exposure?

Also, how difficult is it to file a tax return claiming "remittance basis" without the help of a tax advisor for someone who is not super savvy like me? I'm willing to learn as long as it's possible to do and understand for a mere human.

Thanks in advance for your help!
C

Valuethinker
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Re: UK resident non-dom: what's best investment location?

Post by Valuethinker » Fri Jun 15, 2018 11:00 am

christophe29 wrote:
Fri Jun 15, 2018 8:47 am
Hello!

I hope you won't mind me piggyback riding on the back of this post, but my questions are directly related to a lot of things covered in this post, namely all the rules related to being a UK resident non-dom.

I moved to the UK a year ago and will soon be filing my first tax return. Given my large investments abroad, I plan on claiming the "remittance basis". All my investments were held abroad and made in non-UK securities, so I think I am all fine there. Now, however, I'm in the process of moving the investments to Saxo Bank (Netherlands based entity). My understanding is that since the entity is based in the Netherlands, all investments/securities will be held in the Netherlands as well, so no issues there either. However, the investment plan my advisor is suggesting includes direct exposure to the UK (for example, HSBC FTSE 100 UCITS ETF, or Vanguard FTSE 100 UCITS ETF).

Is it possible to have investments like this with UK exposure and not pay capital gains taxes on them under the "remittance basis" as long as the investment is held abroad and the gains don't enter the UK? Or would I have to pay taxes on these because there is UK exposure?

Also, how difficult is it to file a tax return claiming "remittance basis" without the help of a tax advisor for someone who is not super savvy like me? I'm willing to learn as long as it's possible to do and understand for a mere human.

Thanks in advance for your help!
C
AFAIK yes. It's where the investments are held (not remitted into UK) not what's in them.

But it's easy to avoid UK investments and it won't hurt you much. UK is c. 6% of global index (from memory) and so it won't hurt performance (much) if you do not hold a UK equity fund. And Unilever looks like it's going to drop out of the FTSE UK indices when it drops its dual-listed London-Amsterdam structure ;-).

In fact generally since your income will be in GBP, if you buy a home your home equity will be in GBP, and you will have pension rights in GBP, you want to diversify away from GBP as much as you can in your investment portfolio.

Download the forms and take a look. On a remittance basis, you don't have to report any of the foreign income and capital gains (AFAIK) so it's dead easy. Filling out the initial form claiming that basis, you may want to pay for professional advice on that step.

You could take a view that you fill out the forms and submit, and if they query it, you hire an accountant. However they do have 7 years to look back at anything.

christian
Posts: 1
Joined: Mon Aug 20, 2018 11:43 am

Re: UK resident non-dom: what's best investment location?

Post by christian » Mon Aug 20, 2018 12:04 pm

Hi,

according to my tax lawyer a resident non-dom, using the remittance basis is not considered under the US/UK tax treaty. That means the investor has to pay 30% taxes on dividends and in case of his death she has to pay the full estate tax.

To sum it up for me:

Advantages / disadvantages to buy US fund for residents non-dom in the UK:
+ more choices
+ cheaper with Interactive Brokers
- 30% taxes on US dividends
- double taxation of non US dividends. Each country withholds its own taxes on dividends. From the remaining amount the US withholds another 30%
- must pay estate tax in case of death
- because this fund is most likely to be a non reporting fund under UK law, all capital gains will be taxed with the income tax, not the CGT. This applies only if the investor decides to remit the profits

Disadvantages to buy US funds for UK residents and domiciled:
- because this fund is most likely a non reporting fund under UK law, all capital gains will be taxed with the income tax, not the CGT. On the other hand there is no CGT to be payed each year, as has to be done with the reporting fund.

Advantages / disadvantages for resident non-dom in the UK to buy Ireland / Luxemburg funds:
+ 15% dividend tax instead of 30% tax for US dividends.
+ for non US dividends only the withholding tax from the companies's domiciled country. Ireland itself does not have a withholding tax
- more expensive
- not so much choices

Disadvantages for UK residents and domiciled to buy Ireland / Luxemburg funds:
- a lot of those funds are non reporting. In this case the the income tax will apply. On the other hand, there is no CGT tax each year, as with the reporting funds.

Are those information correct?

Topic Author
stressed
Posts: 59
Joined: Mon Feb 26, 2018 6:28 am

Re: UK resident non-dom: what's best investment location?

Post by stressed » Wed Nov 14, 2018 4:19 am

Revisiting this old thread to make some comments on the last post.
christian wrote:
Mon Aug 20, 2018 12:04 pm
according to my tax lawyer a resident non-dom, using the remittance basis is not considered under the US/UK tax treaty. That means the investor has to pay 30% taxes on dividends and in case of his death she has to pay the full estate tax.
Can you please provide some evidence for this? I searched and couldn't find anything that supports this view, and even found the opposite claim in another forum.
Practically also this would be very difficult. The W-8BEN form is filled in the beginning of the tax year. The remittance basis can be claimed retrospectively on a year by year basis. Is your lawyer suggesting that if someone claims the remittance basis in their tax return they submitted in say October 2017 in respect of the tax year of April 2016-2017, they will then have to go back to their broker and change the W-8BEN they submitted 2 years earlier for the prior calendar year, and request that dividends paid from Apr 2016 to Apr 2017 should have 30% withholding instead of 15% (but the ones from jan to apr 2016 and apr - dec 2017 should still have 15%)?
Same with estate tax, where different rules of domicile apply (there's no remittance!), and the survivors of the deceased can elect to be deemed UK domicile if they so wish, so again the full estate tax won't apply.
christian wrote:
Mon Aug 20, 2018 12:04 pm
- 30% taxes on US dividends
- double taxation of non US dividends. Each country withholds its own taxes on dividends. From the remaining amount the US withholds another 30%
As mentioned above the withholding tax should remain at 15% which for US dividends makes it equal to the L1 tax leak that the Irish funds suffer.
For non-US dividends there could be a 15% additional taxation as you say.
However, this withheld tax can be credited against UK dividend tax which can be significantly higher (if the investor is in 40%+ tax bracket and the 2k annual allowance is surpassed), in which case it effectively becomes zero (it reduces the UK dividend tax liability by the same amount) and thus the non-US dividend leak is equal for US and IE ETFs, and the US dividend leak is lower on US ETFs (as the 15% L1 tax leak for IE funds is irrevocably lost).
christian wrote:
Mon Aug 20, 2018 12:04 pm
- a lot of those funds are non reporting. In this case the the income tax will apply. On the other hand, there is no CGT tax each year, as with the reporting funds.
Most (if not all) Vanguard funds are reporting under UK law, so this can easily be avoided.
Not sure what you mean by CGT each year. CGT is only paid when you sell an asset, in which case it's definitely preferable to paying income tax on the gains. So non-reporting funds are definitely to be avoided. But given the very good selection of cheap reporting funds, this shouldn't be a problem.

illmasterj
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Re: UK resident non-dom: what's best investment location?

Post by illmasterj » Fri Dec 14, 2018 2:36 am

Everyone has already given some excellent advice however one region I don't see mentioned is Singapore. The individual investment itself is something you'll need to research of course, but typically investments there have 0% dividend withholding taxes.

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