American Retired in UK Needing To Replace a USA ETF portfolio with USA Stocks/Bonds

[cvc8445]

My portfolio is currently in US Dollars in American accounts using regular USA ETFs/securities as follows:

US Large Stock-----------------------------15%--------------- VTI
International Large Stock------------------30%--------------- VEU
International Small Value Stock------------9%--------------- VSS
US Small Value Stock-----------------------6%--------------- VBR
US REIT---------------------------------------5%--------------- VNQ
Corporate / Total Bonds------------------- 14%-------------- BND
Inflation-Prot. Bonds/Treasuries/Gilts---- 21%-------------- TIP

(With most of the BND and TIP held in Tax Deferred Accounts.).

The problem is that (in a few years when I am taxed by the UK on my worldwide holdings) the UK apparently will tax me at high UK INCOME TAX rates (20% or 40% at above US$50K equivalent) on my CAPITAL GAINS, DIVIDENDS and INTEREST I accrue from my USA ETFs.

So instead of being taxed in the UK at 18% for the CAPITAL GAINS it will be 20% or 40%. (I will get a credit for American taxes paid but would expect to owe significantly more than that in the UK).

From what I understand this problem is rather similar (in reverse) to how USA handles gains from "PFICs" (offshore-from-USA funds).

So I am (reluctantly) considering (for long-term tax purposes) replacing the portfolio (above) with something similar in Stocks and Bonds. My understanding is that the UK will "correctly" tax USA Stocks/Bond Cap Gains, Dividends and Interest.

Would appreciate any suggestions on an easy to maintain portfolio of stocks and bonds to replace my ETFs. Also whether you think its worth going to the extra maintenance that will be required! Thanks.

P.S. USA Funds e.g. Vanguard USA can apply to the UK Tax Authorities for "reporting/distribution" status to avoid the problem I outline. But Vanguard USA doesn't appear to have done this (nor to understand the issue when I asked them).

 

[Rambler]

cvc8445 -

Question: Why are you in the UK? If for work, did your company send you there? If so, did you get tax equalization treatment in your assignment agreement? If yes, does it cover your investments?

R (expat in Japan)

 

[cvc8445]

No, I don't have a tax equivalency agreement. I am retired.

 

[Rambler]

No, I don't have a tax equivalency agreement. I am retired.

Bummer. My thoughts won't be of much help then. But I am guessing you could get similar results by directly buying the top 20-40 stocks in each of your target funds. It would be a lot of work, and some of the funds' stocks overlap. I do keep a handful of individual stocks, maybe 20 or so, but my equity exposure is mainly in ETFs and mutual funds (trying to rectify that over time). My bonds are mainly munis, not muni ETFs, with some a bit of corporates thrown in via a fund (deferred comp, can't remember the name of the fund). Owning munis though will not help your tax problem if you are living out of country (or even out of state for the most part).

Hope someone else has better ideas.

R

 

[Texas Proud]

Just curious...

Are you a US citizen?

Would they tax trust income?

Are you bringing the income into the UK to live?


When I was there... I was not taxed on any income from outside the UK.. maybe it has changed, but I also was told by many Aussies and Kiwis they also were not taxed and they had lived there many years... I remember they invested in Guernsey as income from there was not taxed in the UK... so why are you being taxed on worldwide income?

The trust idea is just something I am throwing out... if you put everything in a trust, then it is NOT your income unless you take it out of the trust... so, no tax.... but, there are other problems with this... so get some expert advice (PS... you make it a US trust)...

 

[cvc8445]

I am a US citizen living in UK long-term. Currently taxed in UK on remittance-only of overseas-from-UK income (non domiciled). However in April 2012 that will change as I will become domiciled in UK and taxed on worldwide income.

Would they tax trust income? -- Not sure that I can setup an offshore trust or USA Trust with myself as the beneficiary to avoid either USA or UK tax. I am single/no kids. Would appreciate any input about that.

 

[cvc8445]

I am the OP.

I wonder if I could setup a USA Trust now (while I am still non-domiciled in UK) then transfer my USA ETFs into the trust with me as the beneficiary.

Would this shield the USA Trust's Dividends and Cap Gains from UK Income Tax (after I become domiciled in UK in April 2012)? When I need the money I could sell the ETFs and transfer the cash to UK with no UK tax due - is that right?

How much would such a trust cost to setup and maintain in USA? How is this done? I presume such a trust would not shield me from any of my USA tax obligations (is that correct?).

Actually, with UK Cap Gains tax expected to increase from 18% next week (to closer to the income tax rate) all of this may not be worth it! Thanks.

 

[Texas Proud]

I think you will need to find some forum that knows UK taxes... I don't think it is here..

As far as a trust... it is considered a separate entity... so 'it' would have to pay US income taxes... and trust income taxes are higher than individual taxes... so you will need to look to see if the total all in taxes are higher or lower..

Now, if you distribute money, the income passes to you... but then you would seem to have to pay UK taxes... so no savings...

That was one of my questions... IF you need this money to live.... then there is not much you can do to shelter the income... as far as I know...

 

[nun]

Ask this at

UK Yankee - Expat Americans Living in the UK and Moving to the UK

In your situation you should find a dual qualified UK/US tax expert I suggest companies like

specialists in expatriate tax, employment tax, UK, US and international personal tax
BATAX

As a US citizen living in the UK and either remitting funds to the UK or being taxed on your worldwide income by the UK (which depends on your residency/domicile status) you are in a tough situation when it comes to mutual funds outside of retirement funds. If you invest in UK mutual funds the US will see them as PFICs with all the horrendous filling a tax consequences of those. Likewise the UK taxes capital gains from offshore funds (eg US funds) as income to discourage money going offshore to funds that have tax avoidance strategies. This catches regular expat investors and limits investing opportunities.

The way around this is to invest directly in stocks and bonds, but you have to keep very good documentation.

I may be in a similar situation to you one day so my approach is to put as much as I can into a ROTH IRA as it's tax free in US and UK and before going to the UK I'd sell all of my after tax investments so that I'd pay capital gains at the US rate and then use the cash to pay for big ticket items like a house. This will reduce my need for income keeping me in a low tax bracket. Any cash left over I'd put into a UK high interest savings account and use it as my cash buffer and adjust my
asset allocation in my US based retirement accounts accordingly.

 

[cvc8445]

Very good points Nun. You confirm what I thought (unfortunately). A few more points:

- as UK taxes USA ETFs (dividends and Cap Gains) as "income" you can't do "tax loss harvesting" in USA accounts as normal. Because UK won't allow ETF losses to cancel out ETF gains for USA ETFs. Is this correct?

- how do I recreate my ETF portfolio (in my first post above) as stocks and bonds. Any suggestions? How many holdings would be sensible? 100 holdings? How difficult would this be to manage?

- re: ROTH IRA funding. Is it correct that withdrawals from a ROTH IRA is tax free in both USA and UK?

- re: ROTH IRA. If I'm taxed in UK on my worldwide income (arising basis) then I'd assume an IRA to ROTH conversion would be taxed as income in not only the USA but also UK. Is this correct?

- buying real estate as a primary residence in the UK seems like a real option to me (from a tax reduction POV). A capital gain would be completely UK tax free. Similarly in USA the same gain would be $250K tax free. And it would bring my income requirements down as you say. In terms of adding a "house" to my portfolio (above) - should I reduce my number of US REITS in response?

- I also agree with what you say about selling all US holdings before becoming subject to UK tax on a worldwide basis. Particularly in 2010 when the USA LTCG rates are lower than in future years.

Am I missing anything here? Thanks.

 

[nun]

Very good points Nun. You confirm what I thought (unfortunately). A few more points:

- as UK taxes USA ETFs (dividends and Cap Gains) as "income" you can't do "tax loss harvesting" in USA accounts as normal. Because UK won't allow ETF losses to cancel out ETF gains for USA ETFs. Is this correct?

- how do I recreate my ETF portfolio (in my first post above) as stocks and bonds. Any suggestions? How many holdings would be sensible? 100 holdings? How difficult would this be to manage?

- re: ROTH IRA funding. Is it correct that withdrawals from a ROTH IRA is tax free in both USA and UK?

- re: ROTH IRA. If I'm taxed in UK on my worldwide income (arising basis) then I'd assume an IRA to ROTH conversion would be taxed as income in not only the USA but also UK. Is this correct?

- buying real estate as a primary residence in the UK seems like a real option to me (from a tax reduction POV). A capital gain would be completely UK tax free. Similarly in USA the same gain would be $250K tax free. And it would bring my income requirements down as you say. In terms of adding a "house" to my portfolio (above) - should I reduce my number of US REITS in response?

- I also agree with what you say about selling all US holdings before becoming subject to UK tax on a worldwide basis. Particularly in 2010 when the USA LTCG rates are lower than in future years.

Am I missing anything here? Thanks.

That's a lot and I'm not really qualified to comment......but here goes anyway

I don't know how HMRC will treat losses in US EFTs

What and how many stocks to buy is a difficult question and I've always avoided direct stock purchases because of the expenses and the documentation required to file. With 100 stocks I'd hate to file the taxes.

ROTHs are covered in the US/UK tax treaty and are tax free to the same extent in the UK as they are in the US.

If you do the rollover while the UK taxes you on a remittance basis seems like you'd only be liable for US tax. If the UK taxes you on an arising basis you'd take a tax credit on your UK return for US tax paid.

I wouldn't necessarily get out of REITs now even if you are buying a house.

 

[nun]

As a general note I think it's vital to get professional advice in your situation. Also my approach will be to minimize my need for after tax funds by buying big ticket items
with cash. Any after tax funds I'll put in a UK savings account to make their tax treatment simple and I'll adjust my retirement funds AA to take that into account. Buying a house etc with cash will also reduce my need for income and keep me in a low tax bracket. I'll keep US bond and stock funds inside my retirement accounts. The interest I'll get from my UK savings probably won't be enough to live on so I'll use some principal, which I expect to be offset by gains in my US retirement accounts and if it looks like I'll run out before 59.5 I'll do a 72t.

 

[cvc8445]

Nun:


Thanks - that's good advice. The problem is that I can't fit most of my investments into my retirement accounts. If I could that would entirely fix the problem as those are "tax-wrapper" accounts with UK respecting my US accounts and vice versa.

Its because I can only fit 25% of my assets into IRA, ROTH IRA and their UK equivalents (SIPP, Personal Pension account) that I have the problem!

 

[nun]

Nun:


Thanks - that's good advice. The problem is that I can't fit most of my investments into my retirement accounts. If I could that would entirely fix the problem as those are "tax-wrapper" accounts with UK respecting my US accounts and vice versa.

Its because I can only fit 25% of my assets into IRA, ROTH IRA and their UK equivalents (SIPP, Personal Pension account) that I have the problem!

That's a slightly unusual situation, most people have the majority of their investments in retirement accounts, so I can see why you want to find a way of making that after tax money work harder than just having it sit in a saving account. You are definitely in the area of complex tax planning, but as you say, it might not be worth it if the UK capital gains tax goes up. If your gains are big enough to be taxed at the 40% rate it's probably worth paying for advice, but if you'll be in the UK 20% tax bracket it might be easier just to leave the after tax money with vanguard in the US and have the UK tax any capital gains as income. Definitely post this at UK Yankee - Expat Americans Living in the UK and Moving to the UK on their tax forum and give Tower Tax a call. For a few hundred bucks you'll get some professional advice.

 

[nun]

FYI, I did some digging and came up with this article. Scroll down to "US Investments and UK tax". Maybe something can be done to fix the situation

Taxation

 

[cvc8445]

Nun: Thanks for the good advice. (I have read the UK-Yankee forum as well and posted over there as well.)

I've found out some more things relating to this. Raises even more questions and comments which I'll share here.

1) If I keep USA ETFs while taxed on worldwide income in both USA and UK then USA would charge a LTCG Tax (say 20%). UK would charge an Income Tax on the same gain (say 20%). But these are different types of tax - would a UK Foreign Tax Credit work here to eliminate double tax. One is CGT, the other is income tax. If it doesn't prevent double-taxation then even staying in the 20% UK Income Tax band would be punitive.

2) Are there any dual registered UK/USA ETFs? That would avoid USA PFIC rules and UK offshore fund rules.

3) Assuming I left ETF investments in USA and took up UK domicile as expected in 4/2012. If I left UK residence for say Spain or USA after a few years (say 2015) would I still have to pay UK tax on these offshore gains if I sold them while outside of UK? I heard about a 5 year UK rule?

4) By the time I encounter the problem of the USA ETFs (in 4/2012) its likely I'll have mostly capital with low % of capital gains (so have the possibility of transferring "UK Tax-Free Capital" to UK). And my USA accounts are already split properly (3 accounts: capital, income+dividends, capital gains). It might be possible to stay inside the UK 20% income tax limit ($50K USD equivalent) - particularly if I buy a UK house.

So here's my question: should I be aiming to take my living expense withdrawals as dividends and no cap gains OR no dividends just LTCG's. Or perhaps just by selling bonds which presumably would have amost no LTCG tax?

Selling bonds may make sense as I may move my bonds into my Taxable accounts and put my ETFs inside my tax-deferred accounts (to avoid the issue outlined in this thread).

5) Most worried about not being able to do tax-loss harvesting of USA ETF gains/losses due to the UK tax treatment. eg in USA I could sell ETF #1 for $25K gain and sell ETF #2 for $25K loss resulting in zero USA cap gain tax.
However how would UK treat this. As it's viewed as income I don't think a loss would cancel out the gain.

Even more confusing is that in reading the UK HMRC website tax info (which is very poorly written compared to USA's) I interpret it (and I could be wrong) as: in UK the $25K gain would be taxed as income tax but in UK the $25K loss would apply as a CAP GAIN TAX CREDIT. Weird. And I'm not sure in my scenario I could use a UK Cap Gain Tax Credit! www.hmrc.gov.uk/manuals/saimmanual/SAIM6350.htm

6) And on a slightly tangential issue - when I receive my UK GBP inheritance hopefully many years from now it won't be taxed in UK. But will it be taxed in USA?

Appreciate any perspectives about all of this. I think I'm reluctantly going to have to ditch my USA ETFs and start stock/bond picking. Do you know of any good forums about that?

 

[nun]

All your questions are the reason I decided to avoid owning EFTS/mutual funds in after tax accounts if I move to the UK. Without professional help it's just too much trouble. Even with individual stocks and bonds I see it as a nightmare requiring professional help. Hence my
decision to avoid the problem by wrapping my mutual funds in an IRA/401k wrapper going to cash in my after tax accounts.

One suggestion would be to just buy Berkshire Hathaway

 

[impulse]

I was thinking about moving to the UK earlier this year, my bank suggested that I look at offshore insurance bonds. The UK allows for all taxable gains within the bond to be deferred until maturity (which can be 20 years). You can also withdraw up to 5% of the value of the bond annually tax fee. At the end of the term you also have the option to roll into another bond, so any taxable gains are again deferred.

If the $ value is big enough to interest your bank, they should structure the bond with you picking the underlying investments - rather than taking one of their off the shelf products. I know HSBC Private Bank and Barclays Capital offer these, along with the large insurance names like AIG International, Prudential International Assurance etc

Hope this helps, have a look at the Association of International Life Offices website (ailo.org) they have some pretty usefull information.