In March 2018, The Wolf Group caught up with Andrea Solana, Head of Advanced Planning at MASECO Private Wealth in the UK.
Andrea has considerable experience advising high-net-worth individuals with financial interests in multiple countries and holds investment licenses in both the U.S. and UK. In addition to being near and dear to Wolf Group hearts (having worked at Wolf Group Capital Advisors for 8 years before moving to London), Andrea is well-positioned to offer on-point insights on issues and planning considerations for UK-U.S. individuals.
We are pleased to share with you Andrea’s tips and insights on these timely U.S.-UK topics.
UK Pension Considerations for UK-U.S. Taxpayers
1. If used properly, UK pensions can be a great planning tool.
In the UK, individuals who have not maxed out their annual pension contributions can take advantage of a 3-year look-back for catch-up contributions. This is true for U.S. individuals who move to the UK. If they qualify to contribute to a UK pension and also have enough excess Foreign Tax Credits (FTCs) on their U.S. tax return, they can reduce their future U.S. tax without substantially increasing their current U.S. or UK tax.
To do so, they make current and catch-up contributions to the pension, forego U.S. tax relief on those contributions (i.e., choose to keep them fully taxable), and then offset the increase in U.S. tax by applying their excess FTCs. This allows them to use up more excess FTCs (which normally only have limited uses) and generate US tax basis in the contributions. That way, when they retire and begin taking distributions, the distributions are partially or fully non-taxable in the U.S. This becomes valuable for U.S.-UK persons who decide to retire in the U.S. when distributions begin and are no longer UK resident.
2. The pension’s underlying investment strategy should align with the individual’s long-term residency intentions.
If appropriate for individual circumstances, there may be opportunities to custody the UK pension on UK platforms or U.S. platforms, which expands the investment opportunities available to an individual and also allows investment strategies to remain tax efficient and cost effective.
3. Many reasons for expats to move their UK pensions offshore have been eliminated, but some individuals may still benefit from considering offshore options.
Recent events, including the introduction of flexible drawdown rules for UK pensions in 2015 and the removal of the lump-sum death charge in the UK, have eliminated many of the reasons expats used to move their UK pensions offshore. Two groups of expats, however, may still wish to consider offshore qualified pension options in their tax planning: (1) certain individuals who have large amounts of expiring FTCs, and (3) individuals who have pension balances large enough to be concerned with the Lifetime Allowance Charge but who are not yet old enough to begin drawing down their pensions.
Tax-Efficient Investing Tips for U.S.-UK Taxpayers
For tax-efficient investing in both jurisdictions, U.S.-UK taxpayers should invest directly, if at all possible, rather than hold investments within a “tax wrapper” (e.g., life insurance policy, personal pension, etc.). That is unless it is clear the “tax wrapper” is dually recognized under the U.S-UK Tax Treaty. Tax wrappers can often lead to unintended consequences and burdensome rates and reporting requirements.
Outside of a tax wrapper, four-types of investments generally result in tax-efficient investment income in both jurisdictions:
- Individual shares
- Individual bonds
- S.-regulated mutual funds with UK Reporting Status
- S.-regulated ETFs with UK Reporting Status
These types of investments usually qualify for preferential capital gains treatments in both the U.S. and the UK, as opposed to the more burdensome PFIC or Offshore Income Gain (OIG) treatment.
Ensuring that the collective investments also meet the HMRC Reporting Status requirements will not only prevent the investment from being taxed at income tax rates in the UK, but it will also allow the UK resident taxpayer to use the annual capital gains tax allowance of £11,300 before any capital gains tax is assessed. In addition, it prevents double taxation at death, as OIG assets do not receive a step-up in basis at death and are instead taxed as a deemed disposal at death and are still includable in the individual’s UK estate for inheritance tax purposes.
Impact of Brexit on Investment Management for UK-U.S. Taxpayers
While many taxpayers question the impact of Brexit on investment management for UK-U.S. taxpayers, this is a much less important issue than the need to ensure that any investment portfolio is appropriately structured for the individual’s long-term needs and residency intentions.
A globally diversified portfolio should be structured to avoid a home country bias and to avoid hedging back to the local reference currency of the investment. This structure is generally appropriate for the growth-oriented assets of internationally minded U.S.-UK individuals who may not know exactly where they will retire.
Ideally, the fixed-income part of an individual’s portfolio will be aligned with the currency needed for long-term spending and liabilities. This alignment helps mitigate the foreign currency risk associated with any potential exchange rate fluctuations between the dollar and the pound in coming years.