STEVE UK US

Hello all and first let me say what a very informative site this is. However I am looking for clarification of some issues regarding financial products.

I intend moving out to the USA later next year and want to get my finance's in the bet overall position before I make the move.


I have 2 personal pensions and I understand that the US will tax my tax free cash lump sum if it is drawn whilst out there, so my intention was to take the plan into drawdown and get my tax free cash as tax free cash and then leave the money's in Barclays Bank in the UK. Can't see any issues there (I hope)
I also have an offshore bond which does not generate income and currently enjoys growth free of taxation. It is only taxed once it is brought back onshore when cashed in. Just wondered if that is still the case when in the USA.
I believe my ISA funds will no longer be ISA's if I move out there and will be subject to CGT.
Am I right in thinking any savings income from remaining UK accounts will be subject to US taxation under the worldwide taxation and so need to get my UK banks to pay it gross?

Hope this makes sense and some of you guys can help me out here.

regards, Steve

nun

If you take the lump sum before you become a US tax resident there will be no US tax on it. You will have to pay US tax on any interest that the money earns after that. Any further income you take from your UK pensions will also be taxable in the US. Both the pension income and any bank interest won't be taxable in the UK....google "US Individual 2002" and "Form R85" and acquaint yourself with the US/UK tax treaty

No. Your offshore bond will be fully taxable by the US as a Passive Foreign Investment Corporation. These are taxed heavily and there are complicated compliance laws. Owning a PFIC is a "BIG NO NO" for US tax residents or citizens.

You will loose the tax free status of the ISA. The ISA isn't recognized by the US so the IRS looks straight through it and taxes the underlying investments. If it's a cash ISA you pay tax on the interest in the US. If it's a stocks and shares ISA it will be taxed as a PFIC.

Yes....see Form R85

You will probably also have to file informational forms including FBAR and 8938.

When moving to the US it is best to bring as many of your assets to the US too, pensions and bank accounts don't present too many issues, but other investment products do. If you are taking UK pension income you should look at the US/UK tax treaty to see exactly how the income will be taxed. If you have a house it is best to sell it before you come to the US to avoid CGT issues.

JAJ

It's definitely not the case in the USA and as someone else has said, this kind of investment is probably open to taxation under so-called passive foreign investment company rules. You should strongly consider divesting of this before you become U.S. tax resident. And in fact, if you want to keep open the option of filing married/joint for 2015, you should usually divest of this product before the end of 2014 to keep any gains outside the scope of U.S. tax.

You say that your offshore bond "currently enjoys growth free of taxation". I thought the United Kingdom already had rules in place to prevent this kind of tax avoidance. If that's the case, you may find that it is taxable by the U.K. Or by some chance are you non-domiciled in the United Kingdom?

STEVE UK US

Thanks for the replies people. I will check out the information on the "US Individual 2002" and "Form R85".

Seems as though things are not quite as clear cut as I thought on the bond. At least the pensions issue is correct and this can be dealt with and I was right about the income from savings and the ISA rules being defunct.

JAJ. An offshore bond enjoys roll up of growth free of taxation until it is cashed in when ultimately it is taxed under UK rules. unlike the onshore bond below.

If the investment bond was a simple onshore arrangement which is taxed at source in the fund, how would that be affected, is this the same as an offshore bond.

Steve

nun

The IRS will tax the bond the same way whether it'd inside or outside the UK. You have to be careful with terminology for investments as different ones are taxed differently under the treaty and US rules. If your "bond" is just a savings account that pays fixed interest (no dividends or capital gains) then you should apply to have the interest paid UK tax free as it is fully taxable in the US, probably as just interest and no need to bother with PFIC. If you have things like investment trusts those will be PFICs and should be avoided.

STEVE UK US

sorry NUN and excuse my ignorance but what is a PFIC please?

(guess) personal funded investment c_______

And why is it they are such a big NO NO as well, in simple terms please

nun

PFIC = Passive Foreign Investment Company

A PFIC is a pooled investment like a unit trust or investment trust organized outside of the US

The IRS has rules to discourage US tax payers from investing in PFICs....basically after lobbying from the US mutual fund industry. If you own PFICs you have to fill out nasty compliance forms and have potentially higher tax bills than if you invested in US funds.

STEVE UK US

Hello again everyone. Thanks again for all your help, my bond is now being cashed in now I know its a PFIC as i really don't want to be bogged down with bureaucracy when I move out to the USA.

But just wondered if anyone can help me on the pension issue one last time on this. My financial adviser has asked me if I can find detail where it says my pension lump sum will be taxed if it is cashed after I move to the USA. just wondered if any of you have a link to anything that might help with this, seems its a bit of a mare finding relevant information that is specific to this point.

Thanks again

Steve :-)

nun

Article 17(2) and the saving clause of the treaty combine so that a lump sum payment from a UK pension when paid to a US citizen or tax resident remains free of UK tax, but will be taxed under IRS domestic rules. Unfortunately "lump-sum" is not defined in the treaty. The final paragraph in the link explains the taxation of lump sums......it applies to US citizens and tax residents.

DT19876A - Double Taxation Relief Manual: Guidance by country: United States of America: Pensions from 2003

theOAP

Nun beat me to it, but since I have the relevant text open:

Paragraph 2

Paragraph 2 is intended to deal with a particular type of double non-taxation that arose under the prior Convention because the United Kingdom does not tax lump-sum distributions from pension funds. Under the prior Convention, a lump-sum payment was treated in the same way as any other pension, and was taxable only in the country of residence of the beneficial owner. Accordingly, a person who anticipated receiving a lump-sum distribution from a U.S. pension scheme with respect to employment in the United States could avoid U.S. withholding tax on the distribution by establishing residence in the United Kingdom for the year in which he received the distribution. The person would not be subject to tax in either the United States or the United Kingdom with respect to the lump-sum distribution, resulting in a significant windfall.

Paragraph 2 prevents this unanticipated benefit by providing that, notwithstanding the exclusive residence-country taxation of paragraph 1, any lump-sum payment derived by a resident of a Contracting State from a pension scheme established in the other Contracting State shall be taxable in that other State.

Page 63. Technical explanation - US/UK DTA

MidAtlantic

I would be concerned about a financial adviser who didn't know this and asked you to research it.

Cook_County

Is the financial adviser SEC regulated? If not why is he providing US financial advice?

Pulaski

The OP is still in the UK, and not planning to move to the US until next year, so no "US financial advice" is being provided.
If you don't mind me asking, do you need a visa? And if so, which one will you be getting?