Investment options for US expats living in the UK - What to avoid and where to invest

Advising any client who is a US expat on their investment options is never straightforward. This is because the US taxes are based on citizenship while, like most countries, the UK taxes are based on residency. Even if your client has settled in the UK, they still must file a US tax return. Simultaneously, it is also likely they will be subject to UK tax rules as a resident.

These overlapping tax systems create a unique challenge, and mistakes can be costly for the client. Many mainstream UK investment products are off limits for US expats and can trigger punitive US tax treatment, unexpected bills and complex reporting obligations. As such, when making a recommendation to a client, you must ensure an investment is compliant in both jurisdictions.

Why US expats face restrictions and the investments they should avoid

Following the 2009 Financial Crisis, the US introduced tighter reporting and enforcement measures, including the Foreign Account Tax Compliance Act (FATCA). This requires non-US financial institutions to report on US clients and has prompted many companies to restrict or withdraw services entirely.

At the same time, the US treats most non-US pooled funds as PFICs (Passive Foreign Investment Companies) resulting in harsh tax penalties:

• Income and capital gains taxed at the highest US income tax rate
• Interest charges applied to PFIC taxes retroactively back to the date of purchase
• Complex annual reporting requirements.

UK-domiciled funds of all types are typically classified as PFICs, including OEICs, Unit Trusts, most UCITS funds, Investment Trusts, UK EFTs and Crypto Exchange-Traded Notes (cETNs). As a result, many of these popular UK investments simply aren’t viable for US citizens.

Even US-domiciled mutual funds may not be suitable for Americans living in the UK. This is because they lack UK reporting status, meaning gains may be taxed at UK income tax rates rather than capital gains tax rates. Only certain exceptions qualify. HMRC publishes a list of funds with approved UK reporting status, although having UK reporting status does not automatically mean a fund is suitable for US expats.

Finally, even some wrappers may not be suitable for US expats living in the UK. ISAs, for instance, are not tax-advantaged under US law. Income and gains inside an ISA must still be reported to the IRS (the US government agency that collects taxes), which can lead to unexpected tax bills.

What US expats can invest in

If a client is a US expat, they shouldn’t be put off from investing as a UK resident. Despite the challenges outlined above, there are still accessible and compliant options that can help them achieve their financial goals.

Practical options include:

• Direct stocks and bonds: US expats can invest in individual equities and bonds - both corporate and government.
• Funds: US-domiciled funds and ETFs with UK reporting status can avoid PFIC issues for US investors and achieve more favourable UK tax treatment.
• UK pensions: many practitioners treat SIPPs as treaty-recognised pension schemes, allowing tax deferral on investment growth under the US-UK tax treaty. However, positions vary and depend on the specific facts and circumstances.
• General Investment Accounts: these are flexible but require careful asset choice to avoid PFICs
• Junior ISAs: these may work for US children if managed correctly.

Specialist advice is essential

As an advice practitioner, you’ll know the right advice can turn complexity into clarity for a client. However, from PFIC classification to cross-border reporting, this is a highly specialist area. 

If your firm is looking to refer clients to an expert in advising US citizens abroad, Canaccord Wealth can work with you. Our highly experienced team can help your clients avoid common pitfalls and recommend a compliant and efficient portfolio.

To find out more about how we can assist your US expat clients, simply email us at enquiries@canaccord.com.

• About Laurence Leigh
• Investing for US expats with Canaccord Wealth

This article has been written by Canaccord Wealth