Look to have a tax overlay to your saving plan to help save more money
Clearly defining your personal wealth goals and objectives is the first step towards determining an appropriate investment strategy and asset allocation to suit your needs. 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 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. In the UK, each individual has a personal allowance, a capital gains allowance and a dividend allowance that is available. Having investable assets in both spouses names can often maximise the amount of investment income received before being subject to UK taxes and therefore mitigate overall tax 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 that additional rate taxpayers are subject to a tapered annual allowance for contributions to UK pensions, consideration should be given to how to maximise pension/tax deferred contributions as much as possible. For instance, any individuals who still have not fully utilised their carry forward allowances from the prior three tax years may want to consider taking advantage before they drop off in future tax 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 account from a US point of view.
- Avoiding Passive Foreign Investment Company (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 came into effect in this new UK tax year (2017/18) and the inability to pay the Remittance Basis Charge 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 titbits 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 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.