Expat Guide: Investing and Financial Planning for Americans Abroad

High-net-worth global US citizens face a unique set of challenges when managing and investing their wealth. This ranges from complex reporting obligations to conflicting tax considerations. Navigating the international financial landscape, as a US expat, requires specialist expertise and careful consideration and coordination.

Some of the challenges that the US expat community may face include, but are not limited to:

1. Complex Tax Reporting Obligations and Rules

The US taxes worldwide income and capital gains of all US citizens regardless of where in the world you may live. The US Bank Secrecy Act states that every US Citizen, Green Card holder or resident must file a report of Foreign Bank and Financial Accounts (FBAR) if they have a financial interest in foreign accounts (in aggregate) of $10,000 or more and the Foreign Account Tax Compliance Act (FATCA) provisions were set up with the explicit aim of tackling offshore tax evasion.

Subject to where you end up relocating to, your new jurisdiction may also have their own specific set of tax reporting rules and requirements. For example, the UK has recently updated its non-domicile tax rules so that any new arrival into the UK, or a returning resident who has been non-UK resident for the prior ten tax years, is able to exempt foreign income and gains from taxation for their first four years of residency. Thereafter, worldwide income and gains are subject to annual taxation in the UK on an arising basis.

Before relocating, it is vital that you understand the tax position for each jurisdiction and ensure that your wealth is efficiently structured and optimised before moving.

2. Investment Complications

The biggest potential pitfall for a US expat from an investment perspective is the risk of investing in Passive Foreign Investment Companies (PFIC). Any offshore ETF, Unit Trust or Open Ended Investment Company will cause a US taxpayer to fall foul of the PFIC rules, where the relevant investment will be taxed by the IRS aggressively on the growth in value of the investment and potentially suffer additional penalties.

The chosen country that you are moving to may also have rules for investing in offshore investments (from a local perspective) and it is vital that your investment choice is tax-efficient in both jurisdictions.

Rules differ across countries and unfortunately there is no universality.

3. Cross Border Management of US and UK Pension Plans

The way the IRS classifies UK pensions is complex and beyond the scope of this article. Many UK pensions, as an example, could be classified as a ‘foreign trust’ meaning that any growth within the pension would be taxable. Fortunately, the UK has a treaty with the US that may allow the US taxpayer to claim the UK pension plan as a ‘foreign pension’ and thus the growth in value will be tax deferred. The same provision may be applied to protect the growth of company pension arrangements.

A common question is “Can I transfer my US pension into a UK pension?”, to which the answer is no. Whilst many non-US pensions may be able to be recognised as tax-deferred, they are not recognised as the same pension schemes, and therefore, a 401(k), as an example, cannot be transferred into a UK Occupational Pension scheme.

Contribution and distribution rules will likely differ also across the various pension schemes outside the US and careful consideration must be taken to avoid paying any early withdrawal penalties, or over contributing and removing an tax-efficiency from contributions.

4. Foreign Exchange Risk Management

One must remember that US taxes are paid in US Dollars, but local taxes in the country that you move to will likely be paid in a different / local currency. Therefore, from an investment perspective where gains are realised and income is generated, you must be able to consider these in both currencies to ensure the correct figures are reported.

Tax-loss harvesting is an efficient exercise carried out in most jurisdictions, but when you have to consider two currencies, rather than just one, it can get difficult quite quickly.

As an example, in 2022, as part of the UK mini-budget, the Pound plummeted. At the same time we experienced a global equity market sell-off. For a US person investing in US dollars, there may have been an opportunity to harvest some losses. However, if that person was living in the UK, then in Pound Sterling terms, because the Dollar has strengthened against the Pound, they may actually have realised a gain. This concept is called a “phantom FX gain”. You might be paying UK taxes on a capital loss…. which is why you need to be aware of this.

5. US and UK Legacy and Estate Planning

The US is very generous in its lifetime allowance from an inheritance tax perspective, having just been raised to $15m for each individual. However, other countries thresholds and rules may be different. For example, the UK threshold (or nil-rate-band) is £325,000 per individual, which is much less.

Therefore, careful consideration must be given in regards to estate planning and typically the earlier one can prepare, the easier it becomes. For example, something as simple as gifting  during one’s lifetime is simple but so effective, provided you abide by the gifting rules in each jurisdiction.

This article is not meant to scare the reader, but instead make the reader better informed and aware of the complications associated with investing and planning as a US expat.

As MASECO, we maintain a forensic focus on investments strategy, wealth management and tax implications for US families living internationally.

For life’s complexities it’s reassuring to know that you’re not alone. If you feel you could benefit from MASECO’s expertise, we would be delighted to hear from you.

The Legal Stuff

• The information contained herein is subject to copyright with all rights reserved. The document may not be copied, forwarded or otherwise distributed, in whole or in part, to any other party without our written consent.
• Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
• MASECO is not a tax specialist and we recommend that anyone considering investing seeks their own tax advice.
• The views expressed in this article do not necessarily reflect the views of MASECO as a whole or any part thereof.
• This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
• This document does not constitute a recommendation, offer or solicitation to buy or sell any products or to adopt an investment strategy.

Risk Warnings:

• All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.
• Your capital is always at risk.
• Fluctuation in currency exchange rates may cause the value of an investment and/or a portfolio to go up or down.
• Alternative strategies involve higher risks than traditional investments, such as speculative investment techniques, which can magnify the potential for investment loss or gain.
• Any impact from the actual or speculative tax changes contained in this document will depend on the individual circumstances of each client and may be subject to change in the future.
• Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change. The levels and bases of, and reliefs from, taxation is subject to change.  The tax treatment depends on the individual circumstances of each individual and may be subject to change in the future.
• Certain products which may be used within a portfolio in order to give exposure to particular investment strategies may not be regulated in the UK and therefore will not have the benefit of the protections afforded by the UK regulatory regime.

Performance:

• Past performance is not a reliable indicator of future results.
• No assurance or guarantee can be given that any target return will be achieved.
• Illustrations of potential risk or return are illustrative only and do not necessarily reflect possible actual maximum loss or gain.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.

The firm participates in industry award programmes relating to the provision of its investment services and in connection therewith the firm may be required to pay an administration fee for the submission of its application.  Where such payments are made, they will be nominal in value and will not be in exchange for any form of guarantee or promise that the firm will receive the award for which it has applied.  The firm only participates in award programmes where there is an independent panel of judges.