Relocating from the US to the UK is a fantastic opportunity, but it needs financial and investment planning. From taxes to managing investments and health insurance, get familiar with the most essential aspects and practical advice for US expats.
Tax Considerations: Bridging Two Systems
Understanding the Tax Landscape: The US taxes people on global income regardless of where they live. The UK has a residency system by comparison. If you are a US national who comes to live in the UK, then you will likely face taxes in both countries. There’s a tax treaty between the US and the UK that avoids double taxation, but the rules aren’t straightforward.
Key Actions:
- Double Taxation Mitigation: Use Foreign Tax Credits (FTCs) to offset US taxes paid by UK tax. In respect of qualified income, the Foreign Earned Income Exclusion (FEIE) might exist.
- Residency and Domicile Planning: The UK Statutory Residence Test (SRT) determines your residency, so beware of what becoming domiciled can mean for you and your family. Becoming “domiciled” has an impact in relation to inheritance taxes.
- Align Tax Years: The UK tax year is from April 6 — April 5, whereas the US is based on the calendar year. Make sure your financial reporting aligns with both systems to avoid penalties.
Optimising Cross-Border Portfolios
Navigating Tax Traps: It is essential to plan ahead if you are a US expat looking to invest in the UK to avoid tax penalties. UK and EU Mutual funds, including ETFs and passive funds, can trigger Passive Foreign Investment Company (PFIC) laws, leading to additional taxes and administrative expenses. UK-based ISAs, which are tax-advantaged in the UK, aren’t tax-free from the US perspective.
Strategies for Investment Success:
- Portfolio Compliance: Use US-listed funds with UK reporting requirements for US brokerage accounts so you don’t get overtaxed. These are not available in UK Investment accounts due to local financial compliance rules. Additionally, many US brokerage accounts prevent non-residents from buying into US mutual funds once they become non-resident aliens (NRAs). For the optimal setup of your brokerage accounts and pensions in the US and UK, consider financial advice.
- Currency Risk Reduction: Match your investments with your spending money in order to manage exchange rate risk.
- Maintain an Emergency Fund: You want to have at least 3-6 months of salary in a liquid position for emergencies.
Retirement Planning: Harmonising US and UK Pension Accounts
Understanding the US and UK Retirement Systems. The UK and US have entirely different pension systems and rules. US plans such as 401(k)s and Roth IRAs are tax-advantaged in the US but require special consideration in the UK. The tax efficiency of UK pensions like SIPPs provides some of the best opportunities for tax efficient saving while earning in the UK.
Retirement accounts have maximum tax advantage limits set by law. For the average worker in the US, contributions to standard employer plans like 401(k)s cannot exceed $23,000 per year (2024), plus a catch-up contribution for workers over 50. People also can make contributions to IRA accounts under certain circumstances. The UK personal pensions allowance is a cap of £60,000 (or 100% of annual earnings, whichever is higher) including employer contributions. The allowance tapers for those earning over £260,000 annually.
Key Actions:
- Clarify pension contribution rules: Foreign pensions aren’t treated as US-qualified plans by the Internal Revenue Service (IRS), so you can’t deduct contributions you make to a foreign plan from your taxes in the United States.
- Retirement age disparities: There isn’t a universal age when you can access your pension benefits in each country. The usual age of pension eligibility in the UK is 55, and by 2028 that number will be 57. In the US, on the other hand, you can draw down your retirement funds anytime, though you are penalised if you do so before you reach 59.5. Crucially, your domicile will also determine your tax treatment for retirement income.
- Roth Conversions: Consider moving traditional IRAs into Roth IRAs and get tax-free distributions with no further taxes payable in both countries.
- Roll Over 401(k)s or Dorment US Pensions: Make account management easier by rolling over inactive pensions or 401(k)s to an IRA.
- Be Prepared for Withdrawals: Learn about UK tax regulations (the 25% no-tax lump sum) and what they will cost you regarding US tax.
Healthcare: Adapting to the NHS
The British publicly funded National Health Service (NHS) covers all residents with free at the point of service healthcare. However, private insurance can complement NHS services to avoid waiting lists and provide specialist care.
Steps to Take:
- Join a GP: Join your local General Practitioner to receive NHS services when you arrive.
- Evaluate Private Insurance: Private insurance may provide extra reassurance above the NHS and to cover some individual needs, such as elective surgery.
Property and Real Estate in the UK
The UK housing market is very different to the US. It usually comes with shorter mortgage terms, and freehold and leasehold ownership structure may be unfamiliar.
Key Considerations:
- Property Sale Tax Planning: UK private residence relief exempts your main house from capital gains, but the IRS may tax the gain.
- Ownership Options: If you own in joint names with a non-US spouse, this will provide optimal tax benefits; professional counsel is advised.
Estate and Inheritance Planning for cross border assets
US estate taxes apply to assets worldwide. In contrast, the UK uses inheritance tax (with lower exemptions). There is a need to coordinate estate plans in different jurisdictions.
Steps to Take:
- Create Cross-Border Wills: Have wills in force in both jurisdictions to simplify asset distributions.
- Give Gifts: Rely on annual gift exemptions to manage inheritance tax liabilities.
Getting Started: A Checklist for US Expats Moving to the UK
Use this checklist to ensure you’ve covered all key areas before and after your move:
Pre-Move:
- Consult with a cross-border tax advisor to review residency, domicile, and potential liabilities.
- Restructure your investment portfolio to comply with UK and US tax laws.
- Consolidate retirement accounts and evaluate the benefits of Roth conversions.
- Review health insurance coverage and prepare for NHS registration.
- Decide on property rental or purchase plans and understand associated taxes.
- Draft or update wills and powers of attorney for compliance in both countries.
Post-Move:
- Register with a GP for NHS services and consider private insurance.
- Open a UK bank account and establish a credit history.
- File annual tax returns in both the US and the UK, coordinating with tax advisors.
- Regularly review your portfolio and retirement plans for tax efficiency and currency risk.
- Monitor your residency and domicile status to adapt your financial strategy as needed.
Use this resource to manage the complexities of living in the UK as a US expat while securing your financial future. Feel free to let us know if you need any other resources or tools to make your move even easier!