A Financial Guide for US Expats compiled from the 39 Steps to Smart Living
Been here forever? Just landed? Wherever you are in the course of your sojourn on the world’s ninth largest island, be sure of this: Your personal finances are top-of-mind for the busy public servants collecting taxes both here and back home. No need to get hacked off; our guide will help ensure your financial life in the UK is as jolly as can be.
Get used to sticker shock. London is now rated the most expensive city in the world.
Though you’ll need to budget generously for commuting costs.
Good news: in your first 3 years here, with careful planning, HMRC will not currently tax you on your income earned outside the UK. Don’t let this creep up on you, plan for it in advance.
If you accumulate funds for a downpayment in the US, HMRC may charge you up to 45% to move your money across the pond.
US plastic isn’t always compatible with the European chip and PIN system, but a US credit history is a terrible thing to waste and you’ll want those cards for trips home.
Investing or transferring assets between yourselves can spell a tricky tax situation for bi-national couples. Seeking professional advice will keep you right.
This is when the finger of the UK authorities will suddenly claim a stake on your US portfolio, taxing it mightily and heavily. Don’t let this ruin your relationship with the UK, get yourself to therapy (or an informed tax adviser) to avoid paying too heavily.
Mark Year 6 on your calendar as a reminder to start planning your tax saving investment strategy.
This can help ensure that you can deduct your paid UK taxes from your US returns for the concurrent year.
Tax returns in the UK are much simpler than in the US. They are remarkably short, no-nonsense, to-the-point affairs. A bit like your new neighbors.
However you can usually deduct the interest on your home abroad on your US return. UK mortgage lenders may offer short-term fixed-rate loans, but they’re usually more expensive than variable-rate.
There are more languages spoken in London than any place on the planet. Time for you to learn a bit of the financial lingo if you want to save efficiently. For the record: PFIC stands for Passive Foreign Investment Company, or, in plain English, the foreign version of a mutual fund-like vehicle. ISA stands for Individual Savings Account. It comes in a child’s flavor known as a Junior ISA. An ISA grows tax-free from a UK perspective and proceeds come out tax-free. Beware: US authorities look ‘inside’ ISAs and tax the underlying investments annually. SIPP stands for Self Invested Personal Pension, and is similar to an Individual Retirement Account in the US.
It’s time to learn how to calculate taxes in both currencies. The IRS and Oanda are good ports of call for checking exchange rates, but if in doubt consult an expert.
The new law on overseas assets -Foreign Account Tax Compliance Act (FATCA) requires banks to report on all earnings of their American guests. Keep good records; do not try to hide assets. It’s not worth it.
The Knights Who Say Ni cannot protect you from FATCA. Now that you are a resident, HMRC will apply your personal income tax rate (aka offshore income gains) to your US fund holdings; the capital gains rate will apply only if the funds have UK reporting status. Ni! cannot spare you this attack on your gains.
You’ll get slapped with exit taxes if your net worth exceeds $2 million. You also lose the might of Uncle Sam. Consider the story of power lawyer William Browder – the man who stood up to Putin. The State Department wasn’t so interested in helping him in his civil rights battles with Russia once he renounced his citizenship.
We hope you won’t become part of that statistic, however, if you do, you’ll find British courts function differently from those in the US. Our ‘Stepping Towards A New Life’ series can help you understand what to expect.
Surprisingly, whether you use dollars or pounds from your paycheck to invest isn’t your principle currency risk. Rather, it can be hidden in your cash accounts and in the payment streams you will rely on in retirement. Experts wrestle with this topic. You won’t need to. For more information, read our whitepaper on currency risk. It’s written in Plain English.
You need to consider saving for retirement in the currency you are likely to use most often, so you won’t be checking the foreign exchange rate every hour on your smartphone.
But the family has scattered, your kids have become supra- nationals, and meanwhile, your roots are burrowing deeper into British soil. Odds are that your retirement portfolio should be a blend of currencies to take into account the way you really live.
Naturally the math on this is anything but straightforward. Only a
tax expert can tell you how long you have really been here – just as
only Bill Clinton can define the word “is.”
NOTE: in April 2017, the domicile rules will change and non-doms will meet this threshold after UK residency in 15 out of the last 20 years.
You might want to consider structuring your assets outside the UK inheritance tax net. Protecting your estate from heavy inheritance tax will take serious care and deliberation - make sure you seek professional help to avoid leaving your family with less than you’d bargained for.
If you sell your main residence, the IRS will send you a bill for the capital gain, but, cheers, currently HMRC will not.
When you head into retirement, the questions you thought you had resolved years ago suddenly crop up again. It’s time to make a new budget. For American expats, this comes with a twist: Will future estate taxes influence where you officially call home? Or will you select a place you simply love, taxes be damned? We can’t say which choice is right for you – but we can help you understand how to make conscious choices. So if you decide that California will be your residence for the golden years, you may need to sever some ties here. Unfortunately, HMRC may consider you a UK resident if you hold on to your golf club or gentlemen’s club memberships. Pity.
These top tips are a selection from our 39 Steps to Smart Living in the UK.
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