PeterHornby

Hi everyone,

I'm a British citizen who's been living in California since 1990. I have been a green-card holder since 1997 and have been considering applying for citizenship - my wife is a naturalized citizen who was originally British (British parents, born in Canada).

I'm 64 and getting close to retirement, The ramifications - in particular pensions and taxes - are starting to fry my brain.

Cheers,

Peter Hornby
Laguna Beach/CA/USA

BritInParis

Are you intending to retire in the UK or the US? Your wife is still British btw.

PeterHornby

That is, of course, the big question, and one that we're starting to explore. One of the reasons I joined the forum

Yes, my wife is actually entitled to three passports (UK by parentage, US by naturalization, Canada by birth location), but only has two right now.

Peter

Pulaski

As a long-term US permanent resident you are already fully ensnared in the IRS regulations, even if you left the US it would take many years to escape their clutches, so I see no good reason not to become a USC, and you will save yourself the cost and inconvenience of renewing your green card every 10 years.

tht

theOAP

Not really, unless the OP intends to continue working in the UK. The impression given is if he returns to the UK it will be for retirement. Pension income is unearned income. The FEIE only pertains to earned income.

Beraider

It is not clear if the OP would be a covered US person if he decided to voluntarily abandon his LPR and repatriate. Even being a long term LPR it is possible to repatriate and file as a NRA. Filing as a NRA has many treaty benefits not a available to a USC

tht

theOAP

Sadly, the only sure win-win solution is for Peter and his wife to make a final decision now (or before becoming US citizens) as to where they wish to spend the rest of their lives: the US or the UK. One may take US citizenship at any time as long as they remain an LPR in the US, but once they have US citizenship, returning permanently to the UK will come with disadvantages. Returning to the UK without US citizenship has obvious disadvantages if they decide in the future they really do want to be in the US. Without the use of a fool proof, 100% accurate crystal ball, there is no easy way to decide what to do.

US citizenship in the US is a no brainer. US citizenship in the UK is workable, but after years of retirement, it becomes a real PITA if one has absolutely no intentions of ever returning to the US permanently. Renunciation of US citizenship is expensive. US pension providers may respect a W-8BEN from an NRA, or they may not. If not, tax filing for the US will remain even for the NRA (unless they wish to be double taxed). But, an NRA living in the UK has substantial financial advantages over those of a USC living in the UK.

Close family remaining in the US also influences the decision for many.

PeterHornby

Thanks to everyone for the thoughts. The approach we're taking at the moment is that the flexibility of US citizenship for me outweighs the downside of remaining a LPR. I'm interested in theOAP's comment that returning to the UK as a USC has disadvantages. What did you have in mind? Proximity to family is an issue of course, but that's true wherever we are. Right now, the few we have left are scattered over both continents.

And I do not plan to work, at least significantly, after retirement, unless it's as a crew member at Trader Joe's.

Peter

theOAP

Peter, first of all a belated welcome to BritishExpats.

I also lived in Orange County, CA for 9 years, so I'm familiar with Laguna Beach. I've since spent the last 38 years resident in the UK and France. Although born in the US, I have dual US/UK citizenship.

An expression concerning expats is although we may all have the commonality of being expats, nonetheless, "everyone's situation is unique". From the information you have given your unique situation would encompass three categories: 1) the return to the UK for the purposes of retirement, 2) your wife is already a US citizen, and 3) you're an LPR in the US for at least 20+ years. It's always dangerous to make assumptions, but I'll risk assuming you may also be familiar with financial investing. I'll assume you will be a dual US/UK citizen in the UK.

There are a number of disadvantages of residing in the UK for a USC but they vary greatly according to age, goals once back in the UK , and accumulated assets in the US. As you'll understand, the potential disadvantages for a 40 year old with 8 years in the US will differ greatly from those of a 60 year old with 30 years in the US. I'll attempt to limit my comments to what I'm guessing your situation would be as a USC resident in the UK. Please correct me were I've misjudged.

First, it would be wise to retain all US pensions and investment vehicles in the US after the return to the UK. Financial opportunities of a USC resident in the UK are extremely limited, not because they are not allowed (with the exception of the ability to open some accounts due to FATCA or SEC regs.), but because the IRS/Congress severely punishes anything 'foreign'. For most, this limits accounts to standard bank, building society, or cash ISA accounts, investment in property, or self administered funds. No Stocks and Shares ISA or UK pooled mutual funds (PFIC). If funds are required in the UK from US sources, varying exchange rates become a factor, whether USC or NRA. In your case, most pensions would be taxed by both countries; the exceptions being government pensions (you're a UKC resident in the UK) and US Social Security (taxed only in the UK). ROTH's are not taxed by either country. A UK State Pension is taxed in both countries. Worldwide investments are also taxed by both countries, but there can be differing allowances.

A misconception is filing US tax returns are a reason not to be a USC in the UK. They can be very time consuming as various additional forms due to foreign residence will increase the amount of time required to prepare a return filed versus one within the US, and costs for a qualified professional can be very high, but the major concern is the constant new regulations issued by the IRS/Congress (or HMRC) such as FATCA, the stacking rule, the repatriation tax, GILTI, etc., all within the last 15 years. Almost two thirds of my 40+ page US return is comprised of informational FATCA reporting which has nothing to do with tax computations. Due to the above mentioned limitations for a USC, I only have pensions and bank/building society accounts and a cash ISA. Nothing else. There's also FBAR, with all the same information. If all your assets remain in the US, to a degree you'll not have the problem, and your US returns will be much easier to complete, but HMRC reporting may become complicated.

The UK does not tax many gains on personal property (like your home), but the US does (subject to Sec. 121 for the home). Interest from a Cash ISA is tax free in the UK, but taxed by the US (the accumulated, over a number of years at £20,000/year, Cash ISA may now contain £150,000+, easily). The first aggregated £500 (40% band) of interest from normal bank/building society accounts is tax free in the UK, but taxed by the US. Having investment assets in the US will influence UK tax (USC or NRA) since HMRC also tax on a worldwide basis if the taxpayer is on the arising basis in the UK. (durham_lad, please comment if able.)

Currently, if your decision had been to remain NRA on return to the UK, you have a positive situation with a USC wife. She will have to file US tax and information returns every year due to US citizenship, but anything you own independently would not be declared to the IRS, opening up all normal UK investing, including a primary residence. The ability to return permanently to the US in the future would be possible for you, albeit with all the visa applications required.

If you remain an LPR of 20+ years, you may be subject to the US Exit Tax on return to the UK. Nasty business. If so, in most cases, it forces one, financially, to obtain USC before leaving.

Other than the above for someone in your situation, there are no disadvantages to being a USC resident in the UK.

durham_lad

Hi Peter.

Welcome to the site.

Good info as always from theOAP. Our situation is that myself and my wife are both USCs living in the UK. I have 2 US private pensions and we both have IRAs. We also have an after tax brokerage account holding equity funds. Before we moved back I took my name off the brokerage account and converted the mutual funds into an Exchange Traded Fund (ETF) that "reports into" HMRC. The account is only in my wife's name because in the UK she is in a lower tax bracket than myself and in the UK each person files as an individual. The ETF is comprised 100% of dividend paying stocks which are treated as such by HMRC and only taxed at 7.5%. Each year we also sell some shares from this ETF and the capital gains tax is zero for the first £11,700. These figures are on top of her personal tax free allowance of £11,850 which means that she/we pay no HMRC tax on our after tax income from this account. However, when we file our return in the US it is a joint return so do pay some tax to the IRS.

theOAP

Thanks @durham_lad for your input. While we are both USCs resident in the UK, and both retired in the UK, durham_lad's tax situation is very different to mine. durham_lad spent most of his working life in the US with the majority of retirement income sourced from the US; I spent more than half of my working life outside the US with the majority of my retirement income sourced from abroad. Nonetheless, we both have many common situations concerning US and UK tax obligations and restrictions.

It's the morning after I made the above post and on rereading it I feel I need to make further clarification.

Generally, double taxation is overcome by the use of foreign tax credits. Unfortunately there may still be the occasional time when tax is due to both countries.

To elaborate on the comment "A misconception is filing US tax returns [is] a reason not to be a USC in the UK":
The biggest concern for the USC abroad is the US insistence on Citizenship Based Taxation (CBT), unique throughout the rest of the world. The consequences of CBT might best be explained to a group of British expats resident in the US by imagining the following hypothetical situation (the UK has RBT - Resident Based Taxation, in line with the rest of the world).

Suppose the UK had CBT with similar rules to the US. A UKC, resident in the US, would suffer severe punitive taxation owed to HMRC if they owned an US based account with Vanguard, Fidelity, or any other broker. Many of the account offerings of their local US bank would subject them to HMRC punitive taxation. Even failure to inform HMRC of their US accounts could lead to multiple £10,000 penalties. And, the requirement is to inform them twice, on two separate forms to two separate locations declaring the same information. Don't even contemplate owning a US business (GILTI). Pensions would need careful evaluation to be sure an employer paid more into the pension than the employee did. Otherwise, a special infomational return to a separate tax office would be required. The yearly tax return to HMRC would have to be timely filed, but the tax year is different to the US tax year so multiple records would be required. What may be tax free on a US return will likely be taxed by the UK and the highest tax owed between the two countries is the amount that would be paid. In order to escape double taxation, the HMRC return would need to establish tax credits, but tax credits cannot always cover all dissimilar sources of income, so multiple 'baskets' must be calculated. While one basket may offset all US tax paid, another basket for dissimilar income may not allow a credit. The UKC would have to operate, tax wise, under two completely differing sets of rules with each country establishing a tax regime consistent with the social goals of that country. And, on and on...... It's difficult for the USC expat resident in the US to imagine, but not for the USC resident in the UK.

Please do become a US citizen. Then you'll be able to lobby your Congressperson to support legislation similar to the Tax Fairness For Americans Abroad Act.