In 1999, a multi-million-dollar mission to Mars failed spectacularly after a mix up between NASA’s navigation team and the manufacturers threw it off course. NASA had used the metric system for its calculations, whist the manufacturer, Lockheed Martin, provided crucial data in feet and inches.
This failed mission shows how costly it can be to embark on an important endeavour based on incorrect assumptions and misconstrued data – and highlights the importance of robust processes and planning to ensure that nothing is lost in translation.
British expats moving to the United States face an array of complex tax rules and requirements from the IRS in respect of their ISAs and investments, and their pensions and other assets, so it’s crucial that no assumptions are made, and nothing is lost in translation if they are to successfully navigate their new financial landscape and tax regime.
We’ve been helping clients achieve their financial goals worldwide since 2004, and whilst there are specific challenges for British expatriates moving to any new country abroad, the US presents some of the most testing. We help clients manage these challenges as our dual UK-and-US qualifications mean that we understand the specific requirements on both sides of the Atlantic.
Three priorities to focus on when moving to the US
We often find that when people move to the US for work or to retire, by and large they believe things will work the same as they do in the UK. This is a dangerous and incorrect assumption – so we’ve highlighted below three key financial priorities to focus on before you move to the US or as soon after you arrive as possible.
1) Take advice as soon as possible
Individual Savings Accounts (ISAs) are hugely popular in the UK as a tax-free way to invest. But in the US these investments are treated as Passive Foreign Investment Companies (PFICs) which are one of the most punitively taxed investments. There are different methods of taxing PFICs, but the default method, which considers excess distributions, could see you charged the highest federal rate of income tax regardless of your individual tax bracket (37% for the current financial year). In addition, reporting your investment in a PFIC is a lengthy process with each foreign fund in the account requiring a separate declaration. The IRS estimates the reporting form can take more than 40 hours to complete.
We’ve also had conversations with prospective clients who have sought advice from a US financial adviser and have been told that they can simply roll over their UK pension schemes into a US IRA (individual retirement account). This could have had financially devastating repercussions for the individual, and fortunately we’ve been able to intercede, so that none of these rollovers were actioned in this way.
2) Report your UK investments
This brings us to another common assumption – that many expats believe the rules don’t apply to them if they’re not planning on staying in the US for a lengthy period (for example, they’ve moved there for work but don’t intend to settle). If you’re paying taxes in the US, then your investments will count too. And the penalties for not reporting non-US assets to the IRS and US Treasury Department are often steep.
US residents are required to disclose certain non-US assets to the US Treasury Department and the IRS. US taxpayers are also required to report foreign income. Non-disclosure can result in significant penalties, even for innocent (‘non wilful’) non-compliance.
Given the potential expense of non-compliance or misreporting, working with a dual-qualified adviser will provide you with peace of mind and save you significant time and effort.
3) Review your UK pensions
Aside from what we’ve already mentioned about ISAs, before making the move you’ll need to review your UK pensions to ensure they’re still aligned to your current risk profile and your prevailing circumstances and objectives, once you’re resident in the US.
If you hold one or more UK pensions, they may also not be optimised in terms of the investments they hold and /or the management charges you’re continuing to pay.
It’s strongly advised that any PFICs, as discussed earlier, are contained within a qualifying pension and that the ‘wrapper’ (that is, the type of account your investments are held in) offers the necessary protections for US authorities.
A dual-qualified pension expert can review your pensions to clearly set out your options for you, enabling you to see whether your pension investments could be working harder for you, potentially with simplified admin and reduced management fees. They will also be able to show you whether an International SIPP could provide you and your beneficiaries with better outcomes.
If you would like to discuss your requirements with us, contact us today to set up an initial consultation.