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Taxes and Investing as an American in the UK

As I mention in my last post, I currently live in London, England. However, as an American citizen living abroad, reaching financial independence becomes more difficult as I describe below. So what does that mean for folks who want to be financially independent? I’m going to run down the steps I’ve gathered from information sources around the net and speaking to several advisors. Hopefully this helps you with your investments like it did for me.

(Disclaimer: Please note the standard disclaimer here applies. I am presenting my own experiences that have been presented to me by others who have researched this topic. I have done my best to distill it down as a simple action plan. However, as I illustrate below, there are a surprisingly large amount of people willing to trade their time to help you. Please do consult a professional with your situation.)

The Main Problem – Taxes

If you could boil it down to one problem, though, it would have to be taxes. Unlike most countries in the world besides Eritrea, the United States government taxes its citizens and residency card holders even when they are not living in the US. So Americans working and living abroad have to worry about taxes in two different tax jurisdictions. One break you do get from the US government though is the foreign earned income exclusion, meaning you won’t be taxed on any of your income if you make less than $103,900 in 2018, but you’ll still have to file taxes every year.

Because of the tax reporting requirements of American citizens living abroad, most investment companies (even American ones like Vanguard) don’t want to deal with Americans living abroad. They won’t just shut down your accounts of course, so if you’ve been investing you will be ok. But for the beginners, without a US address (or for those of you who attempt to have your mail sent to your new address), you won’t be able to open a new account.

There are also all sorts of tax rules involving investing in index funds in other countries. Those tax rules can negate the gains greatly. I don’t want to go into it here, because I don’t really understand it well, but look up Passive Foreign Investment Company or PFIC when you get the chance. Please note this doesn’t apply to individual stocks though, but we all know how hard it is to pick individual stock

The FI community starts with a do it yourself attitude, and while admirable, this is probably not the place for it (at least not at first). Your UK taxes will be easy as the government does your taxes for you. However, you are going to want help filing your tax returns in the US from one of the US expat tax firms out there (there are a few of them out there).

Update: I found a pretty good guide on taxes for US citizens living in the UK.

Investing

Retirement accounts

From what I’ve seen, retirement accounts around the world tend to be pretty similar. Generally, they all work on the same basic principles. You take a portion of your earnings and then pay them into an account where it can grow and remain untouched until you stop working. There can be, however, differences for what they are called in various countries, their tax treatment, etc. Because of these differences, the IRS doesn’t know how to treat all of these different types of retirement accounts around the world unless spelled out in a tax treaty.

Maximize your pension contributions

Fortunately, the United Kingdom does have a tax treaty with the US that covers the UK pension scheme. According to Thun Financial Advisors, an American firm that helps Americans abroad with investing:

Unlike many tax treaties the United States has with foreign countries, the U.S.-UK treaty addresses pensions comprehensively, with rules related to contributions, earnings, and distributions. For example, while living in London, an American can deduct, for U.S. tax purposes, contributions to their UK pension plan. This deduction is only available while the U.S. taxpayer resides in the United Kingdom.

So like an American with a 401K/403b at work, you should strive to contribute as much as you can. Like the US workplace retirement plans, the government will provide tax relief on what you contribute. As in the States, your employer will likely also match a small percentage of your contributions. Unlike in the States, savings is mandatory, so you are required to put money into a pension and your employer is required to match, but you control the amounts. For most of us in 2018, it should be £40,000 a year contribution limit. This pension allowance also carries over if unused for 3 years.

For those who want to retire early, though, the bad news is that your pension funds are locked away until age 55. Also, there is no way to get the money out early like the 72t or Roth IRA ladder as in the States. You’ll have to come up with some strategies to deal with a locked in pension like the folks at Millenial Revolution did.

Don’t Get an ISA

So the pension takes care of the 401k equivalent, but what about an IRA equivalent? The closest equivalents to an IRA would be the Individual Savings Accounts or ISA. Sadly, the tax treaty does not cover these, so it is best to avoid these. Not only do they not provide the tax protections of IRAs in the US, they also can make it so that you have to register a PFIC. You can read more about this in Why Americans Should Never Own Shares in a Non-US Mutual Fund (PFIC) by Thun. You might as well just use your US investment options if you have them already (Note: there may also be some long term implications of that when living abroad as well. Again consult an advisor).

Other Money You Have

Transfer Money Back to the US

As mentioned before, investment companies do not really take on American expats, with the notable exception of Interactive Brokers. (I’ve never used their service, but the Bogleheads’ wiki has a good breakdown). Because of this, you will likely have to find ways to keep your American investment accounts open and invest with those. There are a few apps that can facilitate transferring money between different currencies, but I like Revolut the best for its simple interface.

General Investment Advice

There are a few US expat financial advising companies out there such as Thun Financial Advisors and Tanager Wealth Management. They will not manage your investments unless your investable assets are over $500000 USD, but they will take phone calls and answer your questions over email for those of you that ask. I’ve emailed them a few times myself about random questions I had about the topics above. Each time, they have responded helpfully to these requests. There are likely a few more expat advisors for Americans as highlighted by Andrew Hallam.

Is there anything else I missed anything else about US expat finances? Any other questions you guys have about it? Let us know in the comments below.

Posted in Financial Independence, Investing, Saving, Taxes

2 Comments

  1. lepstein12054

    Good starting point, a few items to consider:

    1. Your pension contribution in the UK will be limited to the US limits. For the current year that would be 18.5kUSD. Keep that in mind if you are planing on contributing more than that to your UK pension.
    2. You can open an ISA, you just have to be careful what you invest in. If you invest in shares of single stocks, as opposed to mutual or index funds you should be fine as you are staying away from PFICs. Its a good way to invest post tax and ensure no UK tax. As noted above, you will still be subject to US tax on the gains and income from those investments.
    3. While avoiding PFICs is advised for US taxpayers, it is important for certain UK expats to avoid offshore fund status. This is similar to the PFIC rules but for UK tax payers. If you plan on being in the UK for a long time, it is worth further investigating your current portfolio in the US.

    Has anyone put further thoughts into how to deal with exchange rate risk? My plan was to move money back to the US but the GBP/USD fluctuations are harsh and any gains I could make in the market could be wiped by the simple exchange rate fluctuations.

    • Allen

      Hi Lepstein,

      You make some good points for sure. Wanted to try to discuss some of these. Obviously, I’m not a tax professional, but still:

      > 1. Your pension contribution in the UK will be limited to the US limits. For the current year that would be 18.5kUSD. Keep that in mind if you are planing on contributing more than that to your UK pension.

      I don’t think that’s actually true regarding the contribution limits. The UK pension is not a 401k/403b/457 plan and doesn’t have those kind of contribution rules, just the UK contribution rules. Taxes are treated differently as stated here: http://www.pjdtax.co.uk/updates/post/uk-and-us-pensions-for-us-taxpayers

      “Planning points

      UK tax rates are higher than those in the US and you will generally pay more UK tax than you are able to use on your US Tax Return. This excess tax credit can carry forward for up to 10 years before expiring. Pensions allow you to reduce your UK tax and the amount of unused UK tax credits on your US return.

      Where you have pension contributions that have not suffered US tax it may be possible to use up old credits, that may be expiring, by transferring UK pension monies into other plans and not claiming US Tax Treaty relief on the transfer.

      The use of lump sums payments also attracts specific tax relief in the UK and also under the tax Treaty and may also be used in the context of optimising your pension position.”

      Points 2 and 3 are also good, but also make more sense if you plan on living abroad longer term. I probably should have mentioned the PFIC and longer term financial planning for expats, but it’s not something I have experience with yet. If you do please, discuss. And perhaps we can post more about it in the future.

      Thanks for the comment.

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