GregoryN

Help!
I have a Mutual Fund held in the UK which I am wishing to move out of its pension 'wrapper' into an ordinary investment. I envision doing this over a number of years, offsetting mandatory UK tax against US tax, probably with the Foreign Tax Credit.

I will elect to have the fund treated as Mark-to-Market (form 8621), meaning the IRS will tax any growth annually. However, when I make any withdrawals
the UK govt will want it's tax too! How can I prevent this double taxation?

I am a UK/US dual national, and since 'retiring' (due to lack of work) am living in China.

HMRC told me that any income originating in the UK is taxable by them (my house rental and passive funds).

nun

Why would you want to remove the mutual fund from its protective retirement wrapper? You lose the tax deferral and open it up to US PFIC rules....as you point out.

You have also answered you questions as to how to avoid double taxation.....you use Foreign Tax Credits. I know nothing about the Chinese taxes that might be due as a resident there.

GregoryN

People can remove funds from pension wrappers as of this FYear, and numbers of people are doing so -basically my pension payments are only a marginal improvement on standard dividends, and over 20,30 years (for my spouse) the fund growth would strongly influence the balance.

True, while I am withdrawing monies from my pensions I would be incurring UK taxes which could be used as Foreign Tax Credits to offset US PFIC MTM taxes.

However once all funds are out of the UK pension wrapper there would be no more UK taxes, so the PFIC rules would tax any gains, but then the UK would want to levy taxes on any withdrawals.

If there is no way around the double taxation as described in the last paragraph this may kill this idea.

(And China? I would be affected only if I live here for 5+ years.)

theOAP

PFIC rules are designed to discourage US Persons from investing funds abroad. They are meant to be punitive.

"The tax treatment of PFICs is extremely punitive compared to the tax treatment of similar investments that are incorporated in the U.S. For example, an American holder of a U.S. incorporated mutual fund invested in European stocks pays the low long-term capital gains rate of 15% if the fund is held for more than one year. The same American investor who buys a nearly identical fund listed in the UK or in Switzerland (or any place outside the US) will find their investment subject to the PFIC taxation regime, which counts all income (including capital gains) as ordinary income and automatically taxes it at the top individual tax rate (39.6%). In some cases, the total tax on a PFIC investment may rise to well above 50%. Furthermore, capital losses cannot be carried forward or used to offset other capital gains."

Why Americans Should Never Own a Non-US Mutual Funds

With a possible US tax rate of 50%+, even UK tax credits (FTC) may not be sufficient to offset all US tax.

nun

If you are unsatisfied with your UK pension, what about moving it to another provider with better options.

If you take the money from the pension (and I strongly advise against it) the obvious thing to do is move the money to the US. This will avoid UK tax and any PFIC issues.