There are a relatively large number of American expats living in the UK and Europe, many of whom will be looking to access the full range of investment options, savings vehicles and pension schemes available to them in the as part of their overall wealth and estate planning needs.
But they often encounter difficulties when developing a financial plan, such as onerous reporting obligations, criminal taxes and incomplete guidance, writes Neil Williams, one of the private investment firm’s founding partners. LeifBridge.
Americans living abroad should pay particular attention to the complexities of double taxation when it comes to cross-border planning and investing.
While these complexities deserve due consideration, they should not deter a U.S. citizen, wherever they reside, from putting in place a financial plan or investment strategy that takes into account their unique financial circumstances.
Additionally, there are many aspects of financial planning that are beneficial and provide a way to invest more tax-efficiently.
While no financial planning should be considered a “one size fits all” exercise, there will inevitably be several commonalities, including similar challenges faced by American citizens living abroad.
Currency and domicile
Americans abroad will inevitably manage their lives on a multi-currency basis. At the simplest level, they will need to open a bank account in the country in which they live.
At the same time, they will still need to report their US dollar financial assets to the Internal Revenue Service (IRS).
Fluctuations in exchange rates can have a significant impact on an investment portfolio where exchange rate risks exist on cash, fixed income securities and equity investments.
From a financial planning and investment strategy perspective, aligning the base currency of a client’s portfolio with their financial situation and goals can have a positive impact on an individual’s financial situation. .
Perhaps the most common oversight that occurs is when a US citizen living abroad invests capital in a non-US mutual fund or common investment vehicle, without fully understanding the potential tax consequences.
Non-U.S. funds such as Oeics, mutual funds, investment funds, and ETFs generally fall under the definition of a Passive Foreign Investment Company (PFIC) for U.S. tax purposes and, by therefore, any taxpayer US investor is likely to be subject to a punitive tax rate on the gains and income generated by the investment.
Additionally, investing in a non-US mutual fund exposes the investor to annual PFIC reporting, which can be a time-consuming and costly exercise.
Pensions and savings
It is almost always advantageous for an individual to use tax-advantaged savings plans, such as personal retirement plans, as part of their overall financial planning.
But for Americans living abroad, choosing where to put their retirement savings can get complicated.
In most cases, UK pension schemes will qualify under the UK-US tax treaty and as such can be a tax efficient way of building retirement savings. Americans living in the UK. Sipps can provide a wide range of investment options and, if the pension is eligible under the UK-US Treaty, the complexities regarding PFICs will not apply.
Also, for higher and supplemental rate taxpayers using Foreign Tax Credits (FTCs), these can provide significant benefits, particularly if the individual subsequently returns to the United States.
It is important to note that not all pensions, including UK and international pensions, will be eligible for the treaty, so if investors are in any doubt this merits further guidance.
For UK residents, it is common to use an Isa as a tax-advantaged savings account. Isas, however, are not recognized under the UK-US treaty and therefore do not offer the same tax benefits to Americans living in the UK.
Similarly, many insurance-based products, such as onshore and offshore bonds, issued by non-US insurers will meet the requirements of local tax regimes but may not qualify under US tax codes.
Americans investing capital in a qualifying non-US insurance product will incur complex reporting obligations and criminal US taxes, eliminating the potential benefits of investing in such products.
There are offshore insurance products that are eligible in the United States and with proper planning can provide extremely flexible and efficient solutions.
No financial plan would be complete without due consideration of his estate. Trusts are often used as part of an overall estate and estate plan.
However, foreign (non-US) trusts will have complex legal and tax considerations and trustees, settlors and beneficiaries should be aware of ongoing tax and reporting obligations.
For Americans who are philanthropists, using a dual-qualified donor-advised fund (DAF) for their charitable giving can be beneficial, as any donation can qualify for both a tax deduction in the United States and in the UK with the ability to designate where the funds will be donated at a future date.
With concerns about rising inflation, political risks, rising interest rates and a possible recession looming, there has never been more need to protect and grow wealth.
For U.S. citizens living abroad, find a wealth manager who has the knowledge and experience to help them navigate both cross-border challenges and the increasingly complex investment environment. will prove to be a beneficial partnership over time.
This article was written for International Advisor by Neil Williams, one of the founding partners of private investment firm LeifBridge