Americans when they move to the UK focus primarily on adjusting to life in a new country, getting a home, and getting things done. What they tend to miss is the UK rules and tax status of existing US brokerage accounts. It may be easy tileo believe that you’re okay as the US brokerage account has not moved and you are paying US tax according to the rules. UK rules and taxes are different from the US when it comes to income and capital gains. Let’s explain how US-based brokerage accounts are treated and the implications for US citizens living in the UK.
For the US American in the UK, US account taxation is important if you want to make a financial plan and don’t get hit by an unexpected tax bill in the UK.
What Is a Brokerage Account?
A brokerage account is a form of investment account held at a licensed and regulated brokerage firm. This is the common name of a non-taxed account in the USA. The investor deposits funds into their brokerage account, and the broker executes orders for investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) on behalf of the investor. In the UK a brokerage account is more frequently called a general investment account or GIA for short.
Do US-based Investment Accounts matter if I live in the UK?
Yes, if you are in the UK but still have US investment accounts, then those accounts affect your whole financial plan as well as your taxes. For those that pay tax in the UK on the arising basis or are resident, your global income and gains (even US-based income) must be declared to HMRC every year. It is because, even if you’re no longer a US resident, your American investment accounts affect both your UK tax return and your financial forecast.
So if you own retirement funds or after-tax money in your US investments, the UK taxation is essential to know. There’s the UK/US double tax treaty to make some of it possible but you need to compare every account type in order to keep taxes to a minimum and to help your UK financial plans.
Difference Between US and UK Tax Treatment of US Brockerage Accounts?
US and UK tax laws are not the same so the new Americans to the UK might be confused by this. Income from investments, including dividends and capital gains, are generally treated preferentially in the US (particularly long-term capital gains). But these same investments are likely to be treated differently by the UK tax authorities (HMRC) and may lead to higher tax bills than if you may be expecting if use to US tax rules.
For example:
Qualified dividends and long-term capital gains in the US have a flat rate of tax, generally between 0% and 20%.
Simple illustration of tax rates
Investment income (such as dividends) in the UK may attract income tax of up to 45% for higher income earners. We also tax capital gains, but they are very different in terms of rates and treatment.
The result is that a US expat living in the UK will end up paying a lot more tax on their investments, if they don’t get their act together.
Possible Tax Pitfalls for US Brokerage Accounts
- Difference in Income Tax Treatment: US domiciled investments which are tax-efficient including US mutual funds and ETFs may be “offshore funds” in the UK, and therefore liable to income tax instead of capital gains tax.
- Unfavourable to US Funds: Non-UK funds, including many US-focused ETFs, do not have “reporting fund status” in the UK, meaning they are taxed as income rather than capital gains.
- Possible Double Taxation Concerns: The US-UK tax treaty should avoid double taxation in general, but due to timing and classification distinction, there can be delays and resulting differences which raise taxes overall.
Can I keep a US Brokerage Account while in the UK?
If you no longer live in the USA, these account may remain active. There are no rules that you are required to close them. But there are important further questions to ask your self.
What’s in Your Account?
- Are your accounts made up of mutual funds, exchange traded funds (ETFs) or something else? If these funds aren’t on HMRC’s list of reporting funds, they can receive less than optimal tax treatment in the UK – they’ll be taxed as income and not capital gains.
Does your US brokerage providers know you’re a UK citizen?
- There are some variations in how custodians handle accounts for non-US residents so it’s important to know the latest changes in access and handling. For example, we hear purchases of U.S. mutual funds by non-U.S. residents are restricted in order to comply with U.S. regulations. As a result of this, non-U.S. residents may only hold or redeem existing U.S. mutual fund share positions. New initial or subsequent purchases are not permitted.
Are there existing capital gains on your brokerage accounts?
- If you want to import these accounts to the UK, you may have to determine how these gains are tax-effectively governed in the UK and if you need to make gains tax-effectively.
Are your investments US and UK tax efficient?
- Buying investments in your US accounts that support US and UK rules will enable you to make the most of your portfolio for both long-term strategies and tax compliance. Do you know what these are and how to monitor them? That is a critical point.
Are you taking withdrawals from the account? Or Taking Income from Retirement Accounts?
- You should keep in mind that if you are drawing money out of these accounts now, it is often taxed as income in the UK. Taxes affect distributions, and you need to plan for them.
Professional Help and Advice for US-based Brokerage Accounts?
If these things sound complicated, you’re not alone. Making cross-border investments involves working around US and UK tax liabilities, treaty privileges and residence regulations. Talk to an expert about structuring your US assets tax efficiently and in accordance with both governments’ rules.
What to do:
- Seek US/UK Trained Financial Advisor: Having a cross-border financial expert advise you on what investments are compliant to US and UK tax rules, and may help you avoid paying taxes on them.
- Avoid Non-UK Reporting Funds: If you can, try and invest in funds that are classified as UK reporting fund by HMRC. That can make it more likely that returns on these investments will be capital gains and not income.
- Keep Your Residency Status Tracked: UK residency influences taxes, so you’ll want to know the implications of being resident in the UK and how it impacts your US brokerage accounts.
- File Accurately in Both Countries: US Expatriates need to file annual return with the IRS (and in the with HMRC) too. There is a US-UK tax treaty that can stop double taxation, but only if you plan well, pick suitable investments and file properly.