This expat case study talks about how a tax issue was resolved for two Americans living in the UK.
Before we get started, we are financial advisors serving US expats, with a focus on Israel. We’ve written these blogs on expat finance that you may wish to read:
Checklist for moving to Israel
The challenge
A couple from Chicago decided to relocate to London in 2010. For the first seven years living in the UK they paid taxes on their US investments solely in the USA. This was in line with British tax law which grants a seven-year tax exemption on foreign investments to residents who are non-UK citizens. When this period expired the couple was faced with how best to manage their new tax burden as Americans living in the UK.
Higher Taxes
They had been made aware that many US and other non-U.K. fund investments that do not report to Her Majesty’s Revenues and Customs (HMRC) are taxed at a much higher rate in the UK than in the US.
Additionally, American citizens who invest in non-US mutual funds or other similar pooled vehicles are taxed at a premium rate on their US tax return making the option to hold investment accounts outside the US unattractive too.
The Brexit Effect
Brexit had a marked effect on the couple’s tax situation, as it did for many other Americans living in the UK. The pound sterling (GBP) fell in value by 20 percent which meant if they had decided to sell an investment at the same dollar price they bought it for, they would have had to pay a 25% capital gains tax in GBP.
The financial plan
Nardis was approached by the couple after the tax exemption period had come to an end. Norman Chait, Nardis’ Managing Principal, collaborated with the couple’s UK-based attorney specializing in trans-Atlantic taxation to come up with an optimal financial plan for them.
The couple was advised to pay a one-time Remittance Basis Charge (RBC) to the UK tax authority for the year and continue to pay taxes on investments in the US. This RBC was less than what the couple would have had to pay in regular and capital gains tax in the UK, owing to both higher tax rates and the currency effect, had Nardis liquidated their US fund investments. Moreover, the RBC paid in the UK could be offset with US tax credits.
Nardis then realigned the couple’s US-domiciled portfolio prior to year-end by selling those investments that would be charged a higher tax rate in the UK and by purchasing more tax efficient securities. This was achieved while maintaining their overall asset allocation and keeping in line with their financial goals as Americans living in the UK.
What’s the takeaway for Americans living in the UK?
Being a US citizen living in London or elsewhere in Great Britain has lots of advantages – it certainly beats being a tax exile on a small island in the Caribbean – but careful financial planning is required should one want to stay for a while. “It is essential that your investment and tax professionals cooperate and have a keen understanding of the key issues in order to ensure that nothing falls through the cracks,” explains Norman Chait.
This is a general description that can not be interpreted as tax or financial advice. For recommendations specific to your situation, consult an advisor.
We are a financial advisory boutique with advisors in the US and in Israel and serving expats globally. If you are moving to Israel or another country and don’t know where to start when it comes to the financial side of things, please contact us.
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Disclaimer: Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.
