‘I didn’t realise the tax problems that my Stocks and Shares ISA in the UK would cause me. Should I get rid of it and what are my options?’
Stocks and Shares ISA’s are a tax efficient way to invest for a UK citizen living in the UK. However, for an American expat in the UK or a British expat in the US, it’s a different story. Due to your US tax filing requirement, the ISA tax benefits are often lost or heavily reduced. However, the solution for a British expat in the US may not be the same as the solution for an American expat in the UK.
Whilst the tax-free growth that an ISA provides in the UK is often lost for an American, it may still be worth utilising your allowance if you have unused tax credits to offset the tax in the US, or you’ll benefit from lower tax rates in the US. The bigger issue with a Stocks and Shares ISA is not necessarily the ISA itself, but the investments you hold inside of it. The majority of Stocks and Shares ISA’s are invested in collective funds or mutual funds, which are quite likely to be deemed Passive Foreign Investment Companies (PFIC’s) and therefore taxed at punitive rates. PFIC’s are quite a complicated topic in themselves so I’m not going to go into detail about them in this article, but you can find out more by viewing the Cross Border Financial Planning blog https://www.cbfp.co.uk/general-news/passive-foreign-investment-companies-pfics .
Removing these PFIC’s is likely to be beneficial for both Americans in the UK and British expats in America. For an American expat in the UK, an ISA will often only provide a marginal benefit at best whilst you remain resident in the UK. For a British expat in America who plans to return to the UK, the financial planning opportunities differ. This is because although the Stocks and Shares ISA may not be providing much of a benefit whilst you are living in the US, it will continue to provide the full benefit when you return to the UK if you return without obtaining US Citizenship, a Green Card or other connection as a US tax person. Therefore, if you’ve spent years building up your ISA portfolio and plan to return to the UK in the future, careful financial planning is needed so that on the one hand you avoid the tax inefficiencies that many Stocks and Shares ISA’s cause for US connected persons, and on the other hand you retain the tax-free growth on the full investment when you return to the UK.
In combination with financial planning, tax planning is important and we recommend that tax advice is taken when moving from one country to another especially when an ISA is part of your portfolio. To help you with your ISA planning in conjunction with your US connected status, Cross Border Financial Planning can provide guidance and advice. If you have any questions or enquires about this, please feel free to email email@example.com.
The value of investments can fall as well as rise. You may not get back what you invest.
This does not represent personalised advice and that independent advice should be sought.
Cross Border Financial Planning