While taxes & investments can be complex enough for individuals who hold 100% of their money within the U.S., that complexity exponentially grows if you hold assets overseas.
Alison Wealth Management has a diverse group of clients throughout the United States, and we know firsthand how difficult it can be to obtain competent advice if you hold assets in the United Kingdom. The first step is understanding what requirements are imposed on you depending on your taxpayer status. We will generally talk about 3 types of individuals living in the United States:
- U.S. Citizen
- Resident Alien (Green Card Holder/Permanent Resident)
- Nonresident Alien
If you are a married couple, you may find that you fall into a blend of these categories. For example, I am a U.S. Citizen, but my wife is a Green Card Permanent Resident. In general, if you are a U.S. citizen or resident alien married to a nonresident alien, you are considered “Married Filing Separately” unless you qualify for a different filing status. If you pay more than half the cost of keeping up a home for yourself and a qualifying child or other relative, you may qualify for the head of household filing status. If you are a U.S. citizen or resident alien married to a nonresident alien, you and your spouse can choose to have your spouse treated as a U.S. resident for all U.S. federal income tax purposes. This allows you and your spouse to file a joint return, but also subjects your nonresident alien spouse’s worldwide income to U.S. income tax.
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.
Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.
FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
For the purpose of this article, we are going to discuss someone with the status of U.S. Citizen or Resident Alien because they are taxed on worldwide income.
While holding overseas assets (including UK Pension Schemes & Retirement Accounts) there are two primary considerations outside of traditional money management services, reporting & taxation.
We do not advise to act on this general information without conducting a personalized review, but here are some items to consider that we have seen with our clients.
There could be several forms to file depending on what and how much you have:
FBAR reporting to FinCEN:
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
8938 reporting to IRS:
- Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
- Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
3520 or 3520a to the IRS:
There could be the need to file form 3520 or 3520a, which reports transactions with a foreign trust. Some UK pension accounts are viewed as foreign grantor trusts in the U.S. (depending on the ratio of employee-to-employer contributions), and this can be easily missed by tax preparers if they don’t have experience working with UK assets.
8621’s for PFICS (Passive Foreign Investment Company) to the IRS:
In non-retirement accounts, if the client owns PFICs, there could be additional reporting and taxation. These are basically mutual funds and ETFs registered outside of the US.
For all of this reporting, incorrect information or missing forms could generate large penalties, which in some cases can add up to more than the actual tax due.
If you are a U.S. Citizen or Resident Alien, you are taxed on worldwide income (with the exception of tax-deferred retirement accounts during the deferral stage). For example, if you own a stocks and shares ISA, a bank account, etc... in the UK, you should convert the interest, dividends, or gains from GBP to USD and then report and pay income tax on that amount.
If you hold a company pension or SIPP, then you only pay tax on the distribution (but need to report on values as mentioned above). In the UK, you can withdrawal 25% of your SIPP value (depending on meeting some requirements) tax-free in the UK, but there is more to this than you would think. There are crystallised and uncrystallised options as well as drawdown and annuity requirements of certain SIPPS. Also, the U.S./UK double taxation agreement (DTA) is not easy to understand. You would think that because it is tax-free in the UK, it would also be tax-free in the U.S., but I have seen where it is interpreted differently. There is a savings clause in the tax treaty that gives the IRS the ability to tax the lump sum in the U.S. I have worked with CPAs that find this to be a bit of a grey area and clients should know the risks of claiming the treaty and DTA as a reason for not paying tax on the 25% in the U.S.
To cap it off, depending on the assets and asset types you own, you may want to seek professional guidance if this isn't an area you are familiar with. If you simply own an ISA or bank account, it is pretty straightforward in terms of taxes. If you are dealing with withdrawals from a UK pension scheme, it becomes more complex and might require additional attention.
While this type of planning can be complex, we have aligned ourselves with other professionals such as Certified Public Accountants (CPAs) in the U.S., as well as Chartered Accountants & Chartered Financial Planners in the UK. When dealing with overseas investments and the UK – U.S. Tax Treaty, it is prudent to seek professional advice from someone with firsthand experience.
Financial planning and investment advisory services offered through Prosperity Capital Advisors (PCA) an SEC registered investment advisor. For more information, please visit. Alison Wealth Management and PCA are separate, non- affiliated entities. PCA does not provide tax or legal advice.