Author Topic: Moving to USA: bring investments, lose tax wrapper?  (Read 7301 times)

mobilestache

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Moving to USA: bring investments, lose tax wrapper?
« on: October 21, 2014, 02:54:23 PM »
Iím from the UK but moving to the US soon for a new job. I currently invest in UK mutual funds within a tax free wrapper called an ISA, which is like a Roth IRA that you can withdraw from penalty free at any time Ė which is pretty nice and Iíd rather not lose it. The problem is, when I move to the US, I canít hold non-US funds without being massively penalised with forms and tax (search ĎPFICí for info). So Iíll have to sell the funds, but then there are two options:

1. Withdraw everything in cash, convert to $, and invest in funds with Vanguard US.
Pros: Easiest tax return (1099-DIV form from Vanguard). Easy to get broad diversification.
Cons: Currency conversion costs ~0.7% in commission, which Iíd have to pay twice if I convert back on return to UK. Lose several years of UK tax wrapper allowance. Currency fluctuation risk. Time out of the market waiting for SSN and Vanguard to open account (1-2 months?)

2. Buy UK stocks (not funds) within the ISA wrapper.
Pros: Simplest to execute. No loss of UK tax wrapper.
Cons: UK market only = less diversification (although new earnings would be invested with Vanguard US, so this would change over time). Manual dividend calculations at tax return time.

The US doesnít recognise the UK wrapper, so the tax treatment would be the same either way (as qualified dividends), I think. Obviously 1 is best if I remain the US long term and 2 is best if I return to the UK. Trouble is Iíve no idea yet! Iím leaning towards 2 to hedge my options (I can always switch to 1 later), but it means buying individual stocks whilst accepting I probably wonít beat the market, which is a tough thing to do.

Thanks for any feedback!
« Last Edit: October 21, 2014, 02:56:48 PM by mobilestache »

daverobev

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #1 on: October 21, 2014, 05:42:05 PM »
The American tax regime really is a nightmare, eh.

Can't help with the PFIC stuff, but if you want to transfer I'd suggest Interactive Brokers - their forex costs are negligible. At least selling out of the ISA won't trigger cap gains.

daverobev

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #2 on: October 21, 2014, 05:44:17 PM »
Hmm - also, how about converting your £ to $ within the ISA and buying something like VTI? Obviously you'd need a brokerage that allowed you to hold US stuff within the ISA. Then just hold one ETF in your ISA to make reporting on the US side easy. If there is such a thing as an ISA that allows you to hold US stuff, that is.

Left

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #3 on: October 21, 2014, 06:33:17 PM »
Are you moving here permanently? or just for a job that will end later on? I'd leave your money in the UK at least until you get a green card if you are moving to US full time. Why move money to a country you aren't going to be a citizen in? This goes for using roth/ira too, I'm not sure what the process is for someone that will be leaving the country later on since they would be hit by taxes upon withdrawal

webguy

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #4 on: October 21, 2014, 10:05:40 PM »
I moved to the US permanently 5 years ago. I'm still a UK citizen but am currently a permanent resident of the US on a green card. I left about 15,000GBP in ISAs in the UK and it's still there. I'm using it to pay off my student loans over there. Why are you not able to just leave your money over there in your ISA? Are you planning to use it to live off of while in the US? If not then I'd just leave it there and not worry about it.

mobilestache

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #5 on: October 22, 2014, 05:03:26 AM »
@daverobev: I don't think you can hold US-domiciled funds or ETFs within an ISA, unfortunately: https://the-international-investor.com/investment-faq/funds-etfs-eligible-held-isa. Would be nice if life were that simple! I can hold individual US stocks, but that's just a variation of option 2 with added currency conversion fees and tax headaches.

I've heard about Interactive Brokers, but I'd lose the ISA wrapper and have to convert to $ - if I'm going to do that I might as well open an account with Vanguard US, it seems.

@eyem: It's a three year position. Most likely I'd then return to the UK, but I wouldn't entirely rule out staying in the US if another good opportunity came up. Agree that IRAs look more of a pain than they're worth for temporary residents.

@webguy: The US taxes you on worldwide income. Sounds like you have a cash ISA, which is easier as you just convert the interest payments to $ for your tax return, job done. Stocks ISAs are more complex and trigger all sorts of taxes and filing obligations if you're not careful.

There's also another option, which I'd previously ruled out, but I'm now reconsidering:

3. Consolidate to a single UK domiciled mutual fund (e.g. Vanguard LifeStrategy) within the ISA. Pros: Dead simple, keep ISA wrapper. Cons: PFIC filing (IRS form 8621) every year. Taxed annually as income (using mark-to-market) rather than long term capital gains.

The tax is higher and there's an extra form to fill in, but it might be a reasonable temporary option for the first 1-2 years. This is proving to be a tough call!

webguy

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #6 on: October 22, 2014, 07:36:35 AM »
@webguy: The US taxes you on worldwide income. Sounds like you have a cash ISA, which is easier as you just convert the interest payments to $ for your tax return, job done. Stocks ISAs are more complex and trigger all sorts of taxes and filing obligations if you're not careful.

Well surely the returns from your stocks/funds inside your ISA aren't taxable income. You've already paid tax on it when you earned the income in the UK, it doesn't make sense that the US would then tax you on it as it's nothing to do with them. Are you sure that form isn't referring to taxable investments overseas that you're receiving income from? If you have money in a UK ISA which is tax sheltered and is providing returns within that account then so long as you're not taking distributions from it while in the US then surely there's no US tax implication. I'd run this by an accountant if you haven't done so already.

daverobev

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #7 on: October 22, 2014, 07:41:45 AM »
@daverobev: I don't think you can hold US-domiciled funds or ETFs within an ISA, unfortunately: https://the-international-investor.com/investment-faq/funds-etfs-eligible-held-isa. Would be nice if life were that simple! I can hold individual US stocks, but that's just a variation of option 2 with added currency conversion fees and tax headaches.

I've heard about Interactive Brokers, but I'd lose the ISA wrapper and have to convert to $ - if I'm going to do that I might as well open an account with Vanguard US, it seems.


IB has near zero forex costs, that's why I suggested them, if you were going to move the money.

One stock in your ISA: How about Berkshire Hathaway B shares?

But yeah... talk to an accountant. This PFIC stuff is nonsense (but so is FATCA),

mobilestache

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #8 on: October 22, 2014, 07:48:42 AM »
Well surely the returns from your stocks/funds inside your ISA aren't taxable income. You've already paid tax on it when you earned the income in the UK, it doesn't make sense that the US would then tax you on it as it's nothing to do with them. Are you sure that form isn't referring to taxable investments overseas that you're receiving income from? If you have money in a UK ISA which is tax sheltered and is providing returns within that account then so long as you're not taking distributions from it while in the US then surely there's no US tax implication. I'd run this by an accountant if you haven't done so already.

It might not make sense, but it's what they do. The ISA only shelters from UK tax, not US tax, if you are US resident for tax purposes (true for most working visas and permanent residents). This is true for cash ISAs too, by the way - the interest should be declared on your 1040, and the account balance should be listed on the FBAR form every year.

The general rule seems to be: if you hold money or investments outside the US, expect pain.

mobilestache

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #9 on: October 22, 2014, 08:20:19 AM »
IB has near zero forex costs, that's why I suggested them, if you were going to move the money.

One stock in your ISA: How about Berkshire Hathaway B shares?

But yeah... talk to an accountant. This PFIC stuff is nonsense (but so is FATCA),

I can hold more than one stock no problem, but more than one non-US fund requires a PFIC filing for each of them. BRK.B is an interesting idea - I take it you're suggesting it as a mutual fund alternative, as it should be pretty diversified? Still got foreign exchange to worry about, but it's a good option. Holding US shares in UK ISA might get complicated due to US withholding tax. In theory I should be able to avoid it or at least claim it back whilst US resident, but it depends how useful my broker turns out to be with the form filing requirements.

Just to make things complicated, I'm leaning towards a hybrid of my options 2 and 3, e.g. 50% UK stocks and 50% Vanguard Developed World ex. UK index fund. It keeps the tax wrapper and is relatively diversified. The UK stocks produce qualified dividends for US tax purposes - nice. Holding the fund means one PFIC filing per year, taxed as ordinary income on a mark-to-market basis (i.e. gains are taxed each year on market value, regardless of whether I sell anything). The latter is not ideal, but I'm tempted to tolerate the small amount of extra tax and the PFIC form requirement for a couple of years until my situation becomes clearer.

Does that seem a reasonable compromise? Would anyone do it differently? Thanks for any feedback.

daverobev

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #10 on: October 22, 2014, 09:43:03 AM »
Berkshire doesn't distribute anything, and yes I meant as a mutual fund alternative. Arguably still risky though.

If you've found a middle way that isn't too much of a pain in the arse all round, go for it. The fact that tax free stuff other than pensions is not 'seen' by foreign govts is a massive pain in the arse. Bad enough I have to pay cap gains tax on a house in the UK to Canada because of currency fluctuations... sigh.

2lazy2retire

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #11 on: October 22, 2014, 10:10:08 AM »
IB has near zero forex costs, that's why I suggested them, if you were going to move the money.

One stock in your ISA: How about Berkshire Hathaway B shares?

But yeah... talk to an accountant. This PFIC stuff is nonsense (but so is FATCA),

I can hold more than one stock no problem, but more than one non-US fund requires a PFIC filing for each of them. BRK.B is an interesting idea - I take it you're suggesting it as a mutual fund alternative, as it should be pretty diversified? Still got foreign exchange to worry about, but it's a good option. Holding US shares in UK ISA might get complicated due to US withholding tax. In theory I should be able to avoid it or at least claim it back whilst US resident, but it depends how useful my broker turns out to be with the form filing requirements.

Just to make things complicated, I'm leaning towards a hybrid of my options 2 and 3, e.g. 50% UK stocks and 50% Vanguard Developed World ex. UK index fund. It keeps the tax wrapper and is relatively diversified. The UK stocks produce qualified dividends for US tax purposes - nice. Holding the fund means one PFIC filing per year, taxed as ordinary income on a mark-to-market basis (i.e. gains are taxed each year on market value, regardless of whether I sell anything). The latter is not ideal, but I'm tempted to tolerate the small amount of extra tax and the PFIC form requirement for a couple of years until my situation becomes clearer.

Does that seem a reasonable compromise? Would anyone do it differently? Thanks for any feedback.

Did not know this -  "qualified dividends for US tax purposes - nice", my understanding was that it needed to be US companies only.

With regard to the PFIC - there is an option to delay payment of any taxes until such time as you actually realize gains, downside however is that interest is payable on any tax on gains when sale is made,  backdated to earlier years. But there is a potential upside, if you leave the US without a sale of funds in the PFIC you have NO US tax liability. If you decide to stay you can elect to continue with the delayed option or change to paying yearly at ordinary income tax rates ( backdated tax and interest will be due when you make election ) . Keep in mind once you have been on a GC for 6 years you are getting into "exit tax" territory, but that's along way off.
With PFICS I would advise professional guidance.

PS -I have been through these steps after moving here from overseas, started on the delayed election until it became clear that I was here for the long haul, now pay the taxes yearly. Depending on which state you are living in the taxes may also be significant, you can however delay state tax's until a sale is realized irrespective of federal election.
« Last Edit: October 22, 2014, 10:38:57 AM by 2lazy2retire »

2lazy2retire

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #12 on: October 23, 2014, 09:46:15 AM »
IB has near zero forex costs, that's why I suggested them, if you were going to move the money.

One stock in your ISA: How about Berkshire Hathaway B shares?

But yeah... talk to an accountant. This PFIC stuff is nonsense (but so is FATCA),

I can hold more than one stock no problem, but more than one non-US fund requires a PFIC filing for each of them. BRK.B is an interesting idea - I take it you're suggesting it as a mutual fund alternative, as it should be pretty diversified? Still got foreign exchange to worry about, but it's a good option. Holding US shares in UK ISA might get complicated due to US withholding tax. In theory I should be able to avoid it or at least claim it back whilst US resident, but it depends how useful my broker turns out to be with the form filing requirements.

Just to make things complicated, I'm leaning towards a hybrid of my options 2 and 3, e.g. 50% UK stocks and 50% Vanguard Developed World ex. UK index fund. It keeps the tax wrapper and is relatively diversified. The UK stocks produce qualified dividends for US tax purposes - nice. Holding the fund means one PFIC filing per year, taxed as ordinary income on a mark-to-market basis (i.e. gains are taxed each year on market value, regardless of whether I sell anything). The latter is not ideal, but I'm tempted to tolerate the small amount of extra tax and the PFIC form requirement for a couple of years until my situation becomes clearer.

Does that seem a reasonable compromise? Would anyone do it differently? Thanks for any feedback.

Did not know this -  "qualified dividends for US tax purposes - nice", my understanding was that it needed to be US companies only.

With regard to the PFIC - there is an option to delay payment of any taxes until such time as you actually realize gains, downside however is that interest is payable on any tax on gains when sale is made,  backdated to earlier years. But there is a potential upside, if you leave the US without a sale of funds in the PFIC you have NO US tax liability. If you decide to stay you can elect to continue with the delayed option or change to paying yearly at ordinary income tax rates ( backdated tax and interest will be due when you make election ) . Keep in mind once you have been on a GC for 6 years you are getting into "exit tax" territory, but that's along way off.
With PFICS I would advise professional guidance.

PS -I have been through these steps after moving here from overseas, started on the delayed election until it became clear that I was here for the long haul, now pay the taxes yearly. Depending on which state you are living in the taxes may also be significant, you can however delay state tax's until a sale is realized irrespective of federal election.

Have  a read of this -
http://www.deblislaw.com/understanding-the-pfic-rules-without-suffering-a-migraine.html

"A taxpayer who does not make a QEF election is taxed under the pure PFIC tax regime of Section 1291.  Under this regime, taxpayers are permitted to defer taxation of a PFICís undistributed income until the PFIC makes an excess distribution.  An excess distribution includes the following:
i.      A gain realized on the sale of PFIC stock, and
ii.      Any actual distribution made by the PFIC, but only to the extent that the total actual distributions received for the year exceed 125% of the average actual distribution received in the preceding three taxable years (or, if shorter, the taxpayerís holding period before the current taxable year)."

mobilestache

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #13 on: October 23, 2014, 05:00:46 PM »
Have  a read of this -
http://www.deblislaw.com/understanding-the-pfic-rules-without-suffering-a-migraine.html

"A taxpayer who does not make a QEF election is taxed under the pure PFIC tax regime of Section 1291.  Under this regime, taxpayers are permitted to defer taxation of a PFICís undistributed income until the PFIC makes an excess distribution.  An excess distribution includes the following:
i.      A gain realized on the sale of PFIC stock, and
ii.      Any actual distribution made by the PFIC, but only to the extent that the total actual distributions received for the year exceed 125% of the average actual distribution received in the preceding three taxable years (or, if shorter, the taxpayerís holding period before the current taxable year)."

Thanks, good to know. My understanding after reading up: the qualified electing fund (QEF) option is not available for UK funds. So the only options are the normal/delayed treatment you describe above, or mark-to-market (MTM) each year. The delayed method is free if I leave the US without selling up, but if I stayed it'd be taxed as an "excess distribution" at highest marginal rate - 39.6% - plus interest.

The alternative is to MTM every year, which would be taxed as ordinary income at my marginal rate with no interest penalty, but means the certainty of being taxed even if I later leave. Or just bite the bullet of less diversification and buy UK stocks directly to benefit from long term capital gains and qualified dividends.

I've worked through an example on a $100k portfolio. Assume 10% annual growth (4% dividends + 6% cap gain) over 3 years, then either stay in US or leave and become non-resident. 25% marginal income tax band for all three years. Gain of $33.1k in the PFIC; $12k dividends and $21.1k cap gains in UK stocks.

OptionStay in USLeave after 3 years
PFIC Delayed~$14k$0
PFIC MTM$8.25k$5.5k*
UK stocks~$5k$~1.8k*

* Delay selling/capital gains until non-resident in final year

Of course, the difference will be larger/smaller if a greater/smaller return happens. And it assumes UK stocks will return the same as the PFIC fund, despite much less diversification.

Using the table I calculated the expected value of each option given a certain probability of deciding to remain indefinitely in the US after 3 years. PFIC MTM can be ruled out. I should pick PFIC delayed if I'm <18% likely to stay in the US beyond 3 years.

Can't help but feel that picking 20-25 UK stocks is hardly equivalent to a globally diversified portfolio, though. Plus there's all the hassle of reinvesting dividends, corporate actions...

Converting to $ and investing with Vanguard US isn't much better for the reasons outlined in original post.

I am leaning towards the "life's too short, just buy the PFIC fund and be done with it" option. Even with a potential $14k tax bill. Think I'll do it for year 1 at least, as it keeps me in the market with the lowest risk. I can re-evaluate in Dec 2015.

Thanks for your thoughts everyone (though feel free to chime in if you have anything to say about the above!)

2lazy2retire

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Re: Moving to USA: bring investments, lose tax wrapper?
« Reply #14 on: October 24, 2014, 05:12:42 AM »
Fair play - you have clearly done your homework ( much more than I when moving here ) . I was already paying  the higher rate on tax so the delayed option did not seem as punitive at pay up time ( the interest due could go either way depending on return of the fund) . I guess its another factor to consider without over thinking it - ie the delayed option means the money you would use on paying tax each year remains in the fund earning return,  this might change your numbers above. I think from memory that a 12% return is break even.
Also losses within a PFIC are NOT deductible come April 15th.

Now are you keeping your UK house ;)
« Last Edit: October 24, 2014, 05:16:05 AM by 2lazy2retire »