Ensure you have a tax-efficient investment and saving plan
Having clearly defined personal wealth goals and objectives is the first step towards determining an appropriate investment strategy and asset allocation. The additional value add comes with giving proper consideration as to how to meet your goals in the most tax-efficient and optimal manner. As a US person living in the UK, you want to make sure that you avoid the tax traps that are littered within the investment world to mitigate any overall costs of investing.
Below are some general planning considerations for optimising tax-efficiency. You should consider with a US-UK tax adviser on which strategies may make sense for your individual needs.
- If you are married, ensure that both spouses are utilising the UK tax allowances available to them. The UK tax system is more individualised compared to the US where married couples have the ability to file jointly. Each individual generally has a personal allowance, capital gains allowance and, as of April 2016 a dividend allowance that is available. Having investable assets in both spouses name can often maximise the amount of investment income received before being subject to UK taxes and therefore mitigate overall taxes payable.
- Asset locate investments to achieve maximum tax-efficiency. In general, dividends and capital gains receive more favourable tax rates. Therefore, these investments should be held in taxable accounts. Whereas, interest income is taxed as ordinary income and can be optimally sheltered in tax-deferred accounts. Additionally, if one spouse is a non-US person, consider whether your wealth is invested optimally to take advantage of the differing tax status.
- For retirement specific goals, you should consider maximising your contributions to tax-deferred growth vehicles. Generally, employer pension plans (whether that be a US 401k plan or a UK pension) allow individuals to receive tax-deferred growth in both the US and the UK. There may also still be opportunities to contribute to Traditional IRAs and Roth IRAs in the US. The tax benefits of these accounts are generally recognised in the UK as well. For instance, distributions from a Roth IRA are generally tax-exempt in the UK under the US-UK tax Treaty. Given the recent change in rules related to UK pension current year contribution allowances for additional rate taxpayers, consideration should be given to using any available carry forward allowances available over the next few years.
- Understand how various UK tax wrappers are viewed from a US perspective. In general, many different tax advantaged accounts in the UK do not enjoy the same treatment from a US tax perspective. For instance, ISAs and offshore bonds are ‘looked through’ from a US perspective and taxed on the underlying investments. For some, investing in SIPPs can be a good opportunity to use excess foreign tax credits and establish cost basis in the pension for US tax purposes.
- Avoiding PFIC investments. As many know, US persons should avoid investing in non-US registered collective investments as these are taxed unfavourably in the US.
- Investing in US mutual funds with UK reporting status. If a US person taxed on the arising basis invests in US funds that do not have UK reporting status, capital gains earned on the funds are taxed in the UK at ordinary income tax rates. This is known as offshore income gain (OIG) rules. Given the non-domicile rule changes that come into effect in April 2017 and the inability to pay the Remittance Basis Charge once you are UK resident for more than 15 out of 20 years, offshore asset choice becomes a very important decision.
Working to optimise tax-efficiency of assets within the wealth structure that will help you meet your various goals will ultimately help ensure that you do not make your capital work harder than it needs to for you and allows you to hold on to more of your hard earned money which is almost always the desired outcome.
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 article does not take into account the specific goals or requirements of individual needs. 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.