International Catch 22 investment situation

[nun]

I'd like to get the board's opinion about a nasty Catch 22 situation that I may have to deal with. Firstly I'm a dual UK/US citizen so I have to conform to 2 sets of tax laws. While in the US the UK system doesn't apply as the UK taxes on residency so I just invest as any American would. However, if I return to the UK I'll have to comply with both the UK and US tax laws as the US will still tax me as they tax on citizenship.

The nasty Catch 22 part of this relates to "foreign" mutual funds in after tax accounts. The UK will consider any US funds as offshore non-reporting funds and will tax captial gains from them as income while the US considers UK funds as PFIC and you have to "mark to market" each year to avoid a 35% tax. These regulations are to get around the common practice of foreign funds rolling over income and re-characterizing it as capital gains. Obviously most funds don't do this, but governments have no way of knowing that about foreign funds so the just "throw the baby out with the dish water"

So as a UK/US dual citizen resident in the UK all mutual funds are out of bounds. This does not apply to stocks and individual bonds.....looks like I'm buying Berkshire Hathaway or just going the I-Bond/Gilts route or putting my money into US bond investments that throw off income rather than capital gains. Or maybe this is a situation where I have all my after tax money in a CD ladder and adjust my allocation in tax deferred accounts

 

[crazy connie]

You might ask this at the Fairtmark Forum which is staffed by CPA's.

http://www.fairmark.com

 

[Lusitan]

Oy vey. This sounds like a mess. Makes me thankful for the tax-favored plans out there; even non-deductible IRAs have the benefit of avoiding this morass ...

 

[Animorph]

Does using ETF's instead of mutual funds help?

 

[FIREd]

I could potentially find myself in a similar bind one day (US/EU dual). After thinking about it, I think that I would keep stock mutual funds in my 401Ks/IRAs because then I would only have to meet income reporting requirements on the withdrawals. In my case, taxable savings would then probably be invested in CDs and/or an immediate annuity.