We’re very happy to share a recent article featured in The American magazine written by Garima Gupta, Senior Advisor at Hansen Sweeney.

When it comes to dual taxation and multiple jurisdictions, taxes become more taxing and easily confusing. People filing taxes in both the US and UK bear the brunt of this twice every year, mostly because of the dearth of knowledge on the subject not widely and easily known to a naive taxpayer. It can become overwhelming when they reach to the point where they are left with no choice other than to pay additional taxes plus the compliance cost for an advisor to help, given they are no more straight forward for them to do themselves. From my experience of working with US/UK expats, I have learned this to be the known troubler when they are treated differently by the US and UK tax authorities. I am writing here on two such bad apples mainly, for the US/UK tax filers to be aware of and safeguard themselves well in time. Forewarned is forearmed!

UK Stocks & Shares ISA V/S US PFIC

Individual Savings Accounts (ISAs) are hugely popular in the UK due to their tax-free, reporting-free status. However, from the US tax perspective, they are very likely considered as Passive Foreign Investment Companies (PFICs). A PFIC is a foreign corporation which has specific income or asset criteria. UK based stocks and shares ISAs are highly likely to be considered as PFICs from a US tax perspective. This requires additional filing on the US tax return using Forms 8621. This is not only about the filing requirements (of course additional compliance cost to be borne by the taxpayer) but the additional tax payments on the income/gains generated in this investment, not forgetting the punitive rates that apply to the calculation of the tax due. Until now, they have never paid any tax on this investment while being UK residents but when they become aware of their US tax filing obligations, this comes as a real shock. This being tax free was the major motivation for the UK taxpayers to invest in but being a US taxpayer too, they must pay taxes at Federal punitive rates and additional compliance costs each year. This can easily be avoided if known at the time of investing, otherwise, they may need to liquidate such holdings or continue to bear the associated tax and compliance burdens.

US Capital Gains vs Offshore Income Gains in the UK

Like most governments, as they encourage their residents to invest within their own jurisdictions and may not like giving equivalent treatment (can be punitive too) to the investment in foreign funds, UK also has this regime of Offshore Income Gains. Broadly, an offshore fund is an investment fund which is based outside of the United Kingdom and meets certain conditions. Further, if these funds are not approved by HMRC to be classed as an APPROVED FUND (an official list is available on HMRC’s website), any gains generated within those funds would be taxed at the highest marginal income tax rates, currently up to 45%, instead of the more favorable capital gains tax rates. Additionally, the losses from these unapproved funds cannot offset the gains from these funds and are simply netted off with other capital gains and losses which are to be taxed at lower capital gains tax rates. In many cases losses simply go to waste. So, unapproved funds go from bad to worse. Conversely, those same gains (long term) have benefited from preferential capital gains tax rates in the US despite being treated adversely on the UK side. The takeaway for the readers in this situation is to invest in HMRC-approved funds to maximize tax benefits and minimize liabilities. I see a lot of UK-based financial advisors have already started investing only in the approved funds, so it is worth checking with your financial advisor if you have one.

In conclusion, the complexities described are just the beginning of the challenges dual taxpayers may face. It is crucial to consult with a tax professional qualified in both US and UK tax systems to navigate these issues, as the intricacies of tax laws and personal circumstances vary widely.

See the article and magazine issue here.

Garima Gupta is a Senior Advisor at Hansen Sweeney specialising in US/UK expat taxes g.gupta@hansensweeney.co.uk

Photo attribution: courtesy of The American magazine, issue 803