Investing from the UK for US citizens and US permanent residents

US taxable persons in the UK face a unique combination of obstacles and opportunities for investment. By US taxable persons, we mean US citizens (including citizens who have never lived in the US, sometimes known as "Accidental Americans") and permanent residents/green card holders (including those whose green cards may have expired but have not formally abandoned the status by filing form I-407). For brevity, this article uses the term "US persons" to cover this group.

UK investors who are not US persons should see the Investing from the UK page instead.

Overview
The combination of US and UK tax and investing regimes makes for some unique challenges for US persons in the UK.

United States Rules
The United States is unique in imposing its full tax code on all US persons, regardless of their residency. Combining the extensive nature of US tax rules with the often unanticipated consequences of living abroad can have unique challenges. Before reading further, please ensure you are familiar with Taxation as a US person living abroad and the US tax pitfalls for a US person living abroad, as this article does not attempt to cover the entirety of the situation regarding US taxes, only considerations around investing in equities and bonds as a US person in the UK. Subjects such as inheritance tax, real estate, expatriation tax, etc. may be relevant to your situation, but are not covered in depth here. The most important US rules for our purposes are:


 * 1) The Passive Foreign Investment Corporation (PFIC) regime, which makes holding non-US funds extremely unfavorable, from both a reporting and a tax rate perspective.
 * 2) The Foreign Account Tax Compliance Act rules, which mean that many UK brokerages are unwilling to have US citizens as customers.

United Kingdome Rules
The United Kingdom generally does not tax its citizens abroad, but does tax its residents, regardless of citizenship. The UK has some special rules affecting the investments of US persons residing in the UK. Most important are:


 * 1) The UCITS/MiFiD/PRIIPs constellation of regulations. These are EU regulations that were carried into UK law as part of Brexit. These are extensive regulations, but the most relevant requirements is that retail investors can only be "marketed" packaged investments (such as funds) that publish a Key Information Document (also known as a Key Investor Information Document, KID or KIID). No US funds publish such a document, making it difficult for UK investors to purchase US mutual funds and ETFs, although there are some workarounds covered later. Critically, these rules apply to the brokerage, not to the investor - holding US funds that do not publish a KID is no problem, if you are able to get your hands on them!
 * 2) The HMRC reporting funds regime. By default, gains and dividends from "offshore" funds (generally, non-UCITS funds domiciled outside the UK/EU) are taxed at UK income tax rates, rather than the generally lower dividend and capital gains rates. However, funds can elect to "report" to HMRC, enabling investors to take advantage of those lower rates. A full list of reporting funds is maintained by HMRC, and includes many Bogleheads-friendly Vanguard US ETFs. However, these funds are still subject to the KID restrictions above, which may make it challenging to purchase them.
 * 3) Many US brokerages are unwilling to knowingly have customers who are not resident in the US, because this can subject them to the rules of the "other" country. This varies significantly from broker to broker, and even from customer to customer.

The US/UK Tax Treaty
There is a silver lining in all these restrictions - the US/UK tax treaty. While the "savings clause" in Article 1 paragraph 4 dramatically limits the applicability of the treaty to US persons in the UK, there are some critical provisions. At a very high level, these include:


 * 1) Protection from double taxation: there are very few circumstances where a US person in the UK would pay both US and UK tax on the same income. You will generally pay the higher of the two rates, which could result in paying the lower rate to one country and the difference to the other, but not paying both full tax rates.
 * 2) Pensions are generally well protected, including US 401(k) and IRA and UK workplace pension and Self-Invested Personal Pensions (SIPP). There are some nuances and grey areas around some of these, but they are typically the top investment priority for US persons living in the UK. Critically, other tax-advantaged accounts are NOT recognized by the other country. This includes Individual Savings Accounts (ISA) or Premium Bonds in the UK, and 529 or Health Savings Accounts in the US.
 * 3) The treaty enables some things that are not always a good idea - it is one set of rules, but there are cases where you can choose to apply IRS/HMRC rules and not invoke the treaty. The most common case for this is that the treaty allows you to exclude UK pension contributions from US income, but there are cases where this is sub-optimal.

Fundamentally, the treaty offers significant protections, but it's a legal document subject to interpretation, integrating two complex tax systems. This article is not legal advice, and there are cases where the advice of a qualified legal professional are advisable.

Intersection of US and UK Rules
Putting these restrictions together results in nearly a catch-22:


 * US PFIC rules make ownership of UK/EU funds very painful
 * UK KID rules make it very challenging to buy US funds, and if they aren't HMRC reporting funds, holding them is somewhat painful

However, there are six primary (legal) options that can "thread the needle" of these overlapping rules. In very rough order of operations, and with many caveats about nuances, individual circumstances, legal interpretations, and so on:


 * 1) UK workplace pensions and SIPPs are recognized as tax advantaged by both countries via the treaty, and PFIC rules do not apply on investments within a pension.
 * 2) * There are some potentially important grey areas around reporting these to the IRS as foreign grantor trusts on forms 3520 and 3520A - see below for more details
 * 3) IRAs are also recognized as tax advantaged by both countries and PFIC rules do not apply. Either invest in US funds (if your broker will let you) or in UCITS funds, despite them being PFICs.
 * 4) * Critically, you must have US taxable income to invest in an IRA. Typically, this means using the Foreign Tax Credit (FTC) rather than Foreign Earned Income Exclusion (FEIE), or earning more than the FEIE limit.
 * 5) * If you want to use a Traditional IRA and deduct the contributions from UK taxes, this is allowed by the treaty but requires the IRA to have been open prior to moving to the UK. Since Roth IRAs are not deductible, this is not a concern for them.
 * 6) Use a US address to invest via a US brokerage, in US ETFs that are HMRC reporting. This will be subject to both US and UK tax, but not to any punitive provisions.
 * 7) * Only you can decide if you are willing to be less than forthcoming with your brokerage and use a US address where you are not actually resident. This is not typically considered illegal, but may be contrary to your brokerage's terms of service.
 * 8) * Alternatively, you may find a brokerage that doesn't care about following the KID rules, in which case you can still invest in US ETFs that are HMRC reporting. This compliance risk would be on the broker, not the investor.
 * 9) Invest in individual stocks, ideally in as passive a way as possible. If you are going to go this route, it is likely advantageous to use an ISA and at least avoid UK tax and reporting requirements.
 * 10) Buy options on US ETFs and exercise them in order to get the underlying fund. While the ETFs themselves cannot be marketed to retail investors, options on them are allowed.
 * 11) * This is an advanced tactic and not covered further in this article, but is used by some UK/EU residents to get around the KID requirements, even if they are not US persons.
 * 12) Become an "elective professional client" (sometimes known as an accredited or qualified investor) within the meaning of the MiFiD/KID rules, which means that the retail investor protections are no longer required and you can buy US ETFs without issue, as well as other complex products that are generally not Bogleheads-friendly. To qualify, you must request the status from your broker and satisfy them that you meet at least 2 of these requirements:
 * 13) Carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters
 * 14) Financial instrument portfolio (not including your primary residence) of at least €500,000
 * 15) Worked/working in the financial sector for at least one year that required/requires knowledge of the transactions or services you want to use