punitive tax on 'foreign collectives'

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All

I have a UK resident relative with dual US nationality.

They have been advised to sell all their UK collective holdings (eg Unit Trusts and Investment Trusts) as these are taxed punitively as 'PFIC's by the US IRS.

We are trying to work out where they can invest (other than simply in shares of ordinary trading companies) in a way which is diversified and thus fairly low risk.

I have heard that there are now some Vangard ETFs that are both regarded as 'non-PFIC' by the IRS and report to HMRC (so not taxed punitively here as foreign collectives). However, I don't know which stockbroker(s) might allow purchase of these. Vangard won't tell me as they 'don't give advice'! I am wondering whether they need to somehow open a US broking account?

I'd be very grateful for any advice on how to go about choosing:

1) a diversified non-PFIC, HMRC reporting investment potfolio and
2) a UK or EU stockbroker that would allow purchase of it.

I have also posted this on the 'international and expat' board but do let me know if there is a better place for these questions.

Thanks,
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[scrumpyjack]

or renounce US citizenship as many, including Boris, have done!

[TedSwippet]

They have been advised to sell all their UK collective holdings (eg Unit Trusts and Investment Trusts) as these are taxed punitively as 'PFIC's by the US IRS.

Yup. The US's PFIC tax rules are way worse than HMRC's 'non-reporting fund' treatment of offshore funds and ETFs. The latter "only" applies income tax rates to capital gains, when sold. The former, PFIC, applies income tax at the highest rate in existence to capital gains, then apportions them across the holding period and charges interest for the artificially backdated gain. The paperwork alone is estimated at around 40 hours per holding.

We are trying to work out where they can invest (other than simply in shares of ordinary trading companies) in a way which is diversified and thus fairly low risk.

Honestly, however little it appeals, owning a diversified basket of individual shares will probably be the simplest solution. See below for why.

I have heard that there are now some Vangard ETFs that are both regarded as 'non-PFIC' by the IRS and report to HMRC (so not taxed punitively here as foreign collectives).

The list is here: https://www.gov.uk/government/publicati ... ting-funds
It's a honking great Excel spreadsheet, so finding stuff on it can be a challenge. Work by CUSIP. The main Vanguard US domiciled ETFs are on it though: for example VOO, VT, and VTI.

However, I don't know which stockbroker(s) might allow purchase of these. Vangard won't tell me as they 'don't give advice'! I am wondering whether they need to somehow open a US broking account?

Here is where things become sticky. Firstly, many UK platforms will now outright reject US citizens, thanks to FATCA. For example, AJ Bell and Vanguard UK. If you can find one that is happy to open an account, though, you will then find that unless you have a portfolio of £500k or more, it is probably impossible to buy US domiciled ETFs in it, thanks to an EU regulation known as PRIIPs. Brexit offers no relief, as the UK has imported PRIIPs into its own UK PRIIPs.

The alternative, opening an account with a US broker, is also likely to prove difficult to impossible. Again because of FATCA, but also because of US KYC laws in general, very few if any US brokers will open new accounts for non-US residents. Interactive Brokers is a US based specialist international brokerage that will take clients from a wide range of countries, including US citizens living in the UK, but even they will no longer allow EU and UK residents to buy US domiciled ETFs, because of PRIIPs, a part of MiFID 2.

Basically, the US has now made it virtually impossible for US citizens living outside the US to invest in collective investment vehicles of any kind. Those who moved out of the US but with pre-existing US brokerage accounts are somewhat okay, particularly if they retain a US address, say that of a relative, so that the brokerage is unaware that they no longer live in the US. Others, though, are now coralled into suboptimal behaviours. In addition, a UK ISA is no protection against US tax, including the horrible PFIC tax rules.

US citizenship renunciation is the 'nuclear option', but despite being expensive (and raising the potential for having to pay a soviet-style 'exit tax'), record numbers of people are taking it. It's not hard to figure out why.

[dspp]

All

I have a UK resident relative with dual US nationality.

Thanks,
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Funnily enough a very close relative of mine is dual UK-US-etc and I have had to do a bit of digging to help them.

I would suggest a discussion with HR Block (https://www.hrblock.com/expat-tax-preparation/) regarding fees for their services. The reason I say this is there is the tax itself, and there is the cost of making the annual US tax declaration. For a dual citizen who is not a tax lawyer and not in an easy category the tax prep fee is worth understanding as self-preparation is not easy. In the case of my relative I was able to ascertain over the course of a very helpful discussion that a) the HR Block fee for their situation would be of the order of $100-$150/yr, and b) that it was highly unlikely that any US tax would be payable at all given their circumstances. I have no connection with HR Block by the way, but they are the biggest and most cost-effective of the various providers that I know of.

There are pros and cons of retaining US citizenship. Especially given the current trajectory of the UK it might be wise to consider the option value of retaining the US citizenship for at least the next 3-4 years.

Regarding investment choices in this situation you seem to be getting good info from the other posters who know more about that than I do.

regards, dspp

[telemark15]

US ETFs with HMRC reporting
https://www.bogleheads.org/wiki/Vanguar ... ting_funds

You might need to find a US broker. Charles Schwab? Fidelity international?

I believe funds within pension wrapper is OK but do double check.

PAIF is a total pain! You get the worst of both world.

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Thanks to everyone who has replied so far. This largely confirms what I have been finding out myself.

The 'personal' (combined with Brexit-exit) plan for the last few years has been:

1) to obtain another (EU) residence/citizenship & passport [sadly missed claiming Irish passport by one generation] and then
2) renounce US citizenship. [the embarrassment of half the nation voting Trump has evidently made this a 'must do' anyway!]

[I spared you the irrelevant extra complexity in the O.P. ! ]

In the mean time, we will look for a balanced set of accessible (non-PFIC but HMRC reporting) collectives for my relative. Failing that, I think we will be trying to identify a range of individual company shares and fixed interest (bonds) and, perhaps, property to diversify enough to minimise risk of loss.

Any steers as to how to do that in a way that might mimic a Vantage Life Strategy set of 'buy and forget about' funds could be useful!

Thanks again
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