A Short Financial Guide for Brits in the US
Just like any international move, the financial transition for UK expats in the USA can be complicated. Here’s how to ensure your financial health remains robust as you adapt to your new American life.
Understanding the Tax
The cornerstone of holistic financial planning for any expat, especially those hailing from the UK, is understanding the tax implications in the USA. The American tax system can feel like a labyrinth to newcomers, with federal, state, and sometimes local taxes to consider. In contrast to the UK’s relatively straightforward tax regime, the US tax structure includes several layers and is heavily dependent on your residency status.
Key Tip: Engage with a tax advisor who understands both the US and UK tax systems. They can help you navigate double taxation treaties, optimize your tax situation, and ensure compliance on both sides of the pond.
Manage UK Retirement Savings Wisely
Pensions are a crucial component of retirement planning, yet they’re often neglected, especially during the hustle of relocating.
For UK expats in the US, managing pensions becomes even more challenging. Most UK pension providers are hesitant to deal with clients residing abroad, particularly in the US. Similarly, UK-based financial advisors may be unable to assist once you’ve moved. This can leave expats without adequate support to manage their pensions, potentially leading to poorer returns, currency mismatches, and unnecessarily high fees for ineffective services.
Whether your pension is a defined contribution (money purchase) scheme or a defined benefit (final salary) plan, you do have options. One viable solution is transferring your pensions into an international Self-Invested Personal Pension (SIPP). An international SIPP remains under UK regulation but offers greater flexibility in investment choices, allows for currency conversion to USD (among others), potentially lowers costs, and provides more effective management of your UK pensions while abroad.
Additionally, it’s important to remember that you can usually withdraw 25% of your UK pension as a tax-free lump sum (PCLS) in the UK. While this is generally tax-free at the federal level in the US thanks to the US-UK Double Taxation Agreement, some states may not recognize this exemption, so it’s crucial to understand the specific rules that apply in your state. https://www.gov.uk/government/publications/usa-tax-treaties
Key Tip: Consulting with a financial planner who is dual-qualified in both the UK and the US can help you navigate your UK pension options as a US resident.
UK Investments: Avoid the PFIC Pitfall
Many Brits I speak to are unaware that their UK investments may fall foul of strict US laws on overseas investments. The US can categorize almost all non-US investments as Passive Foreign Investment Companies (PFICs), which can lead to punitive tax rates in the US. Further, the US does not recognize popular tax-efficient structures such as ISAs, therefore they look directly at the underlying investments which could be PFICs. Careful planning in this area is paramount to ensure your overseas investment assets comply with US laws.
Key Tip: Consider liquidating or restructuring certain assets before becoming a US tax resident or consult with a financial planner to create a US-compliant investment portfolio.
Reporting Requirements
If you’re a UK expat living in the US, one of the key compliance issues you’ll encounter involves filing Foreign Bank Account Reports (FBARs).
You must file an FBAR if, at any point in the tax year, the combined total value of all your non-US financial accounts exceeds $10,000. This requirement applies even if that sum is distributed across multiple accounts.
The types of financial assets that must be included on an FBAR include everything from bank accounts, and investment portfolios, to personal pension funds held outside the US.
April 15th is the deadline for submitting these reports. Be aware, that the US takes the reporting deadlines seriously, and failure to comply can lead to severe penalties. Non-willful failure to report can incur a fine of up to $10,000, while willful neglect could lead to a penalty of $100,000 or 50% of the unreported amount, whichever is greater.
Key Tip: To streamline the process of FBAR filing, consider consolidating some of your UK accounts
Written by: Robert Hoey – Independent Financial Adviser
