THE TRANSATLANTIC MAGAZINE
Covid-19 brought difficulties for many people including market volatility and economic uncertainty. In a prior article published in the July-August 2020 issue of The American we spoke about preparing for the unexpected; making sure your finances are organised, that you maintain a sufficient cash buffer, and that you review your existing asset allocation on any investments to ensure that risk levels continue to align with the evolution of your goals and objectives. If you completed that exercise, then you should be in good stead.
With the uncertain backdrop that still continues there may be an unexpected outcome for those who have been fortunate enough to retain work through the Covid crisis. With less money being spent on largely discretionary items such as entertainment and travel, for a longer period, some people have found additional cash accumulate in their pocket. With this additional cash you may find that, following a review, it is appropriate to allocate some of the new savings to investing. Even if you haven’t invested previously, and you find yourself with just a small amount of extra savings, it may provide a long-term opportunity; investing is not solely for ‘the rich’ and it is an important component to reaching many longer-term financial goals, especially in today’s extremely low interest rate environment.
If you do find yourself looking to invest some of your extra savings, it can be appropriate to focus your attention on ensuring you remain tax efficient in your investment strategy. As a US person living in the UK, avoiding the tax traps that are littered within the investment world is important to mitigate any overall costs of investing.
From an investment perspective, when you are a US person paying tax in the UK on an Arising (worldwide) Basis, you need to be mindful of the structure of both your onshore and offshore assets. It may be optimal to consider maximising the use of any recognised tax wrapped products (for example, a Traditional IRA, Roth IRA, 401k or UK occupational pension scheme, etc.) should your goals align with the merits of using the vehicles, given the fact that the recognition of the tax wrapper removes the worry of whether the underlying assets are tax efficient. If you are not currently maximising your own contributions or the contribution your employer is willing to add to your UK occupational pension scheme, your extra savings may be well served by being directed here to benefit from tax deferred savings and tax relief on contributions.
For any assets held outside of a recognised tax wrapped product (which includes ISAs, given that ISAs are considered taxable accounts from a US tax perspective), you should pay close attention to whether the assets are tax-efficient not only from a US perspective but also from a UK perspective. Doing so, may help mitigate any unnecessary and disadvantageous tax charges.
In order to remain tax efficient in both jurisdictions, you should remember to avoid the purchase of any non-US regulated collective investments which results in Passive Foreign Investment Company (PFIC) exposure or the purchase of any non-UK collective investments that do not have UK reporting status and thus will attract offshore income gains (OIG) taxation as opposed to capital gain treatment. In both instances, taxpayers could end up attracting tax at income rates (and in some instances interest charges) on any capital appreciation as opposed to being able to benefit from more palatable capital gains tax rates.
Tax efficient securities
To break it down, the following types of securities are generally considered tax-efficient for a US person living in the UK:
• Individual shares
• Individual bonds
• US regulated ETFs with UK reporting status
• US regulated mutual funds with UK reporting status
These types of investments should allow you to claim favourable capital gains rates in both the US and the UK as well as utilise the (current) £12,300 capital gain allowance in the UK on any sales in a given year.
Being proactive with your unexpected savings can go a long way to creating a foundation for your long-term planning needs. If you also ensure that the structure of your investments remain tax-efficient from both a US and UK perspective it will allow you to take advantage of available US and UK allowances and mitigate incurring unnecessary tax costs which ultimately act as a headwind to investment returns. By optimising the tax efficiency of your assets your capital will not need to work harder than it needs to and allows you to hold on to more of your hard-earned money which is almost always the desired outcome, especially during these economically uncertain times.
Risk Warnings and Important Information
All investments involve risk and may lose value. The value of investments can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. Currency exchange rates may cause the value of an investment and/or a portfolio to go up or down.
The information in this article is provided for information purposes only and does not take into account the specific goals or requirements of any particular individual. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
The information is based on our understanding of current tax law and practice and sets out some basic information about certain tax considerations from an investment perspective. However, MASECO Private Wealth is not a tax specialist. All tax rules may change and we strongly recommend that anyone considering investing seeks their own tax advice. The tax treatment of any investment or particular strategy will depend on the individual circumstances of each person and may be subject to change in the future. This document does not constitute and should not be construed as investment, tax, accounting, legal or any other advice. The information contained herein is subject to copyright with all rights reserved.
MASECO LLP (trading as MASECO Private Wealth) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, WC2R 0HS. Telephone calls are usually recorded for your protection.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered in the US with the Securities and Exchange Commission as a Registered Investment Adviser.
To find out more go to masecoprivatewealth.com