Arising Basis Taxation and your Investment Portfolio
Upon arriving in the UK, most Americans are non-domicile for income tax purposes. Usually you can elect to pay tax on the remittance basis so that UK tax is only paid on foreign income or gains when they are brought into the UK. Once you have been resident in the UK for more than 7 out of the last 9 tax years you are taxed on the arising, or worldwide, basis unless an election is made to pay an annual Remittance Basis Charge (otherwise known as the RBC). Under rules that come into effect for the new UK tax year, this RBC can only elect to be paid for the tax years prior to meeting a UK long-term residency of more than 15 out of the last 20 years. For many Americans, paying the annual charge often does not make financial sense due to being subject to US tax on a worldwide basis. As a result, it is usually in your 8th UK tax year that you often find yourself dealing with worldwide taxation in two jurisdictions. Knowing what is tax-efficient from both a US and UK perspective becomes of utmost importance.
It is essential for anyone with an investment portfolio to review their holdings ahead of crossing the threshold to be subject to the arising basis of taxation. Most people are aware of the punitive tax treatment in the US on many non-US regulated investments. Anyone looking to invest money overseas should understand that it is almost always ultimately best to avoid investing in non-US regulated collective investments (otherwise known as Passive Foreign Investment Companies, or PFICs) as these are taxed unfavourably in the US. Additionally, in general many different tax advantaged accounts in the UK do not enjoy the same treatment from a US tax perspective. For instance, offshore bonds are often viewed as PFICs and ISAs are ‘looked through’ from a US standpoint and taxed on the underlying investments. Understanding how your Self Invested Personal Pensions (SIPPs) are treated and reported from a US perspective is also beneficial as some tax professionals when preparing your tax return will report pensions as though they are foreign grantor trusts and therefore ‘look through’ the pension wrapper.
What most people may not know is that owning US collective investments such as mutual funds or exchange traded funds (without UK reporting status) can bring about similar treatment in the UK to the PFIC regime in the US. Any offshore collective investments that do not have UK reporting status will attract offshore income gains (OIG) taxation as opposed to capital gains treatment. A higher or additional rate taxpayer will find themselves paying 40% or 45% income tax on gains as opposed to 20%. Additionally, OIG assets can potentially bring about two layers of taxation at death. OIG assets are deemed to be sold at death with income tax being assessed. Then, to the extent that you are also deemed domicile for UK inheritance tax purposes, the assets (less any income tax paid) are also includable in your UK estate.
The exact date that you cross over the Arising Basis threshold can sometimes be tricky depending on when you arrived in the UK. It can often be beneficial to seek advice from a US-UK qualified tax adviser to make sure that you understand properly. Year 5 or 6 can often be a good time to review your assets and understand what structural changes might be needed. This will allow you to take your time and avoid having to rush into making any hasty decisions. Reviewing your portfolio and making any required changes before being taxed in the UK on a worldwide basis can potentially save a lot of unnecessary tax from having to be paid!
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above articles do not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.