Saving and investing where your child's an American citizen in the UK

Saving for a sibling or children in the UK is a wise decision but if they are American citizens or passport holders it will be more complicated. U.S. persons often face challenges when trying to open investment accounts in the UK due to a combination of U.S. and UK financial regulations. Additional complications arise for

Edale is a financial adviser firm that can assist with overcoming these pains and help set up accounts for your children, whether its a cash savings account to get presents paid in or for money from Santa or the Easter Bunny; through to stocks and shares portfolio. We can help parents with financial advice and create accounts for your child, sibling or children, irrespective they are American citizens and living in the UK.

We are financial advisors here to help with general savings and tax-efficient investment plans that are US and UK tax compliant.

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Complication your children with US passports face with savings and investments in the UK

FATCA Compliance: The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report the financial information of U.S. persons to the IRS. Many UK banks and investment firms may find these reporting requirements onerous, leading them to be hesitant or even refuse to open accounts for U.S. persons.

Regulatory Burden: The compliance costs and regulatory burden associated with servicing U.S. clients can be high for UK financial institutions. This includes the need to understand and adhere to both UK and U.S. regulations, which can be complex and time-consuming.

Tax Reporting Requirements: U.S. persons are subject to U.S. tax on their global income, including any income from investments made in the UK. This requires them to file additional tax forms and potentially pay U.S. taxes on their UK investments, complicating their tax situation.

Risk of Dual Taxation: While the U.S. and UK have a tax treaty to prevent double taxation, navigating the treaty can be complex. There’s a risk of dual taxation if the investor does not correctly manage their tax liabilities in both countries.

Limited Investment Options: Some UK investment products may not be suitable or available to U.S. persons due to either U.S. or UK regulations. For instance, many UK-based mutual funds are considered Passive Foreign Investment Companies (PFICs) under U.S. tax law, which can lead to unfavourable tax treatment for U.S. investors.

Banking Policies: Individual banks or investment firms in the UK may have their own policies that restrict services to U.S. persons. These policies might stem from the institution’s risk management strategy, where they may view U.S. clients as high-risk due to the aforementioned regulatory complexities.

Exchange Rate Risk: Investing in a different currency can introduce exchange rate risk. Fluctuations in the GBP/USD exchange rate can affect the value of the U.S. person’s investments in the UK.

Cultural and Practical Barriers: Differences in investment culture, market practices, and time zones can also pose practical challenges for U.S. persons managing investments in the UK.

Investment options we can offer Americans in the UK

Edale can advise a wide range of tax-efficient wrappers for American children in the UK. These are most commonly Junior ISA (Cash and Stocks & Shares): enabling clients to invest in a tax-efficient way on behalf of a child.

Cash Junior ISA for American child

Purpose: Allows saving money in the form of cash.
Interest: Earns tax-free interest, similar to a standard savings account.
Risk Level: Low risk as the capital is secure (subject to the solvency of the bank or building society).
Accessibility: The funds are locked until the child turns 18, except in exceptional circumstances.
Contribution Limits: There is an annual limit on how much can be contributed. For the tax year 2022/2023, this limit is £9,000. This limit is shared between any Cash and Stocks & Shares Junior ISAs the child might have.

Stocks & Shares Junior ISA for American child

Purpose: Invests in stocks, shares, bonds, and other investment vehicles.
Returns: Potential for higher returns compared to a Cash ISA, but with more risk.
Risk Level: Higher risk, as the value of investments can go up as well as down.
Accessibility: Like the Cash ISA, funds cannot usually be accessed until the child turns 18.
Contribution Limits: Shares the same annual contribution limit as the Cash Junior ISA.
Management: Can be managed by a parent or guardian, but the investment choices are often broader than in a Cash ISA.

Common Features of Both Types:

Age Eligibility: Available for children under 18 who live in the UK.
Tax Benefits: No tax on interest or investment gains.
Ownership: The account is in the child’s name, but a parent or guardian must open and manage the account until the child turns 16.
Transferability: Funds or investments can be transferred between different Junior ISA providers.
Conversion at 18: On the child’s 18th birthday, the Junior ISA automatically converts into an adult ISA, allowing the child to continue benefiting from tax-free savings or investments.

Considerations:

Long-Term Commitment: Funds are locked away until the child’s 18th birthday.
Investment Risks: The Stocks & Shares Junior ISA carries investment risks, and the value can fluctuate.
Contribution Limits: Total contributions across both types of Junior ISAs must not exceed the annual limit.
No Withdrawals: Other than in exceptional circumstances, funds cannot be withdrawn until the child is 18.

Parents and guardians considering opening a Junior ISA should think about their long-term savings goals for their child, their risk tolerance, and how the ISA fits into their overall financial planning.

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Financial advice that solves your child’s need and complications

Edale focuses on supporting savings for children to give them a financial start in life. The technical difficulties to invest as a child should not be limited

Product to suit your child’s residency and citizenship

We can advise a UK personal pension plan and individual savings account that is designed especially for holders of US Passports.

Flexible amounts with no minimum

We advise clients of all sizes and wealth. From the shopfloor to the boardroom. There is no minimum despite being in a unique situation.

US tax efficiency for UK pension savings

The UK + US tax treaty, allows for efficient savings and access where other financial institutions may turn you away.

Frequently Asked Questions

Parents living in the UK with an American child looking to invest for their future have a range of questions, reflecting the unique financial, tax, and legal implications of their situation. Here are a few of the common questions we get asked.

Can my American child get an ISA (individual savings account)?

In short Yes, but its not commonly available and needs some guidance to ensure value for money, compliance with UK + US laws and suitabile for the longterm.

What’s the catch?

There are two hurdles; here’s a short answer on these. (1) most product providers do not accept US Citizens as it puts reporting obligations on them which is too much hassle so they close the door to everyone with a US Passport. And (2), reporting obligation to the IRS – this can be a headache for the parent. The headache is eased with threshold and ensuring that suitable investments are held. The rule is not to buy assets in the ISA that are non-compliant with the IRS tax rules.

How much should I put into an ISA for my child?

The answer depends on several factors, including your financial goals, the time horizon until your child will need access to the funds (an ISA is only accessible when they are 18years old), and your current financial situation.

Let's break down a strategy that involves both a lump sum investment and monthly contributions.

Initial Considerations

Product Setup Costs: Initial costs can include platform fees, fund management charges, and any advice or transaction fees if you're using financial advisory services. These costs can vary widely depending on the provider and the investment choices you make.
ISA Allowance: For the tax year 2023/24, the annual allowance for a Junior ISA is £9,000. This limit applies to the total contributions for the year across both cash and stocks and shares JISAs.
Investment Time Horizon: The longer the investment period, the more potential for growth due to compound interest. Consider when your child will gain access to the ISA (currently at age 18) and your financial goals for the fund (e.g., university fees, first car, house deposit).

Lump Sum Investment

A lump sum investment has the advantage of immediately being exposed to the market, which can be beneficial in a long-term investment due to compounding growth. The amount of the lump sum will depend on your available resources and the product setup costs. Assuming you have already accounted for the setup costs:

If you can afford it, an initial lump sum of anywhere from £1,000 to £5,000 can be a strong start, leaving room for additional contributions up to the £9,000 annual limit.

Monthly Contributions

After accounting for the lump sum and setup costs, monthly contributions can help in dollar-cost averaging, reducing the impact of market volatility. The amount should be what you can comfortably afford without impacting your financial stability.

To maximize the ISA's potential, consider monthly contributions that will bring you close to but not over the annual limit by the end of the tax year. For instance, if you've invested a £3,000 lump sum, you could contribute £500 monthly [this amount is often the exception rather than the rule] (£6,000 over 12 months) to reach the £9,000 limit.

Calculation Example

Let's do a simple calculation excluding product setup costs:

Initial lump sum: £3,000
Monthly contribution: £500 for 12 months = £6,000
Total annual contribution: £9,000

This strategy fully utilizes the annual JISA allowance, offering a balanced approach between making a significant initial investment and spreading the risk with regular contributions.

Final Thoughts

Remember, the key to successful investing is consistency and choosing investments that match your risk tolerance and time horizon. It's also essential to periodically review your investment choices and adjust your contributions as your financial situation changes or as your child approaches the age of 18.

Consulting with a financial advisor can provide personalized advice tailored to your situation, ensuring that you're making the most of the opportunities available while considering all relevant costs and allowances.

My child was recently born in the UK and I want to save but they are a US Citizen. What can I do?

For a child who holds both UK and US citizenship but is resident in the UK its quite straightforward: if the child is a UK resident, they can have a Junior ISA, and it grows tax-free. There are reporting obligations to the IRS and you need to ensure compliant investments are held but this is easily achieve with advice

What investments can I buy for my American child in an ISA?

We can offer both stocks and shares as well as Cash ISAs.

What are the tax implications for my American child if we invest in the UK?

Understanding the tax obligations in both the UK and the US is crucial, as the child may be subject to taxation in both countries.

Can my American child have a Junior ISA (JISA) or a Child Trust Fund (CTF) in the UK?

These are popular investment vehicles for children in the UK and are possible ISAs are generally more common for our clients, but eligibility and tax implications for US citizens do require clarification and parents to be aware.

What are the best investment accounts for children with dual citizenship?

Parents can seek advice on accounts that are favourable in terms of tax and flexibility for children who hold both UK and US citizenship.

How do we report our child’s investments and income to the IRS and HMRC?

Navigating the reporting requirements for child investments in the US and UK tax systems can be complex. There are methods to make this easier but its not always wise to DIY (Do It Yourself).

Are there any specific financial planning strategies for US expats with children in the UK?

Yes. We can assist you to understand these and pick the most suitable.

It seems to hard to bother.

Dont be frustrated. For parents investing for their American children in the UK it should not feel too onorous. If you’ve got as far as reading this page you want to provide the gift of financial security, not have the burden of tax complexity, so let us help you.

Invest in compliance with UK and US rules

Few financial service providers and tax-free savings accounts allow US citizens. We can advise you and ensure tax efficiency for your child’s incestemtm. Everyone’s needs are different so to discuss your case call us or message us.

Helping US passport holders with UK savings

We can help a range of American and American passport holdings resident in the UK.

Saving and investing where your child’s an American citizen in the UK