nun

If you are a UK resident for tax purposes the capital gains on foreign funds (ie US mutual funds) held outside of retirement accounts are taxed as income by HMRC, which is why it might be an issue. A good strategy is the one that J.J. describes; sell your taxable mutual fund investments before returning to the UK, then pay US capital gains, and put the money in a savings account. This can be part of your fixed income allocation. It goes against the general rule of keeping income generating investments like fixed income and bonds inside of retirements accounts, but given the tax regs it seems like a sensible thing to do. You can then invest in mutual and inside your tax deferred accounts. Of course any withdrawals from them will be taxed as income as you have deferred income tax on them.

aes1

Sometimes I think it was so much easier and wiser in the days when people hid all their money under the mattress!!!

J.J

Hello aes1,
Yes, as nun says, UK will tax US Mutual Funds Capital Gains as income when you sell as a UK resident, not at the lesser capital gain rate as would be the case for a UK Mutual Fund (Unit Trust). If you are ok with this, either because you have no other income or if your Mutual Fund has not increased in value since you bought it then it's a personal choice.
My conclusion is to sell before I leave US and pay just the US Capital Gains tax rate (which happens to be 0% up until end 2010 if you in 15% or less Fed Tax bracket). The proceeds will go into savings accounts / CD's until we move the $$ to UK when exchange rate is favorable over the next couple years. Yes, interests rates in US are quite low now so we won't make much in savings accounts but then stock market fluctuations wont potentially erode capital either since this is retirement cash. Interest rates in UK are currently higher than US so the sooner we transfer to UK the more interest we'll get balanced against what we expect the exchange rate to do.

Like you aes1, when I started to try to figure out future finances UK / US it seemed better to just put it all under the mattress. The more I read and thought and talked and wrote down a plan (nothing more than a few pencilled boxes with titles and movement arrows) for the holdings that we have, one at a time, the more it became clearer. Searching and reading in BE and UK-Yankee, together with IRS and HMRC sites eventually made sense of it all. For instance, take US Mutual Funds, when you sell you can make a profit or loss. Then just consider how the US and/or UK will treat it if you are US or UK resident for tax when you sell.
Personal preference comes into it too, re: the mattress approach, we are working to make our finances simpler as we approach retirement.

aes1

I must thank Nun and you, J.J, for doing all the legwork. Whenever I look into the situation myself, I end up quitting half way through! So my conclusion is (and please correct me if I am wrong): Sell my non retirement related mutual funds now, place in savings accounts/Cds in $$ till needed. As to my retirement IRA - I will reach 59.5 in August and hope, fingers crossed, to have sold my house and moved before then, so I should leave that be and, when I need to withdraw from it, pay the tax in $$ first, then transfer the net amount into the foreign currency? Hopefully when the exchange rate is more advantageous?

nun

It's important to understand the issues yourself, but I'd recommend you get some professional advice too. BATax.com and Towertax.com are good places to start. I think it's best to get them to do a couple of tax returns to show you everything you need to do and then maybe you can do it yourself in following years.

aes1, I don't know your citizenship/residency status and that is critical to how you'll be taxed. J.J and myself are in the rather strange situation of being dual US/UK citizens with the possibility of being ordinarily resident in the UK which opens us up to being taxed on our worldwide income on an arising basis by both the UK and US.

If you are in that situation too it's definitely best to realize your capital gains before you leave the US and open yourself up to UK tax. So sell taxable mutual funds and your house etc too. I'm going to put the proceeds from my taxable mutual funds in savings accounts. I'll probably leave some in the US in CDs and the rest put in a high interest UK account so that I have a ladder of maturities and use that cash as a buffer against any stock market down turns. Remember if you are a US citizen you'll have to declare any foreign accounts above $10k on form TDF90-22.1.

I think you have the idea wrt the IRA withdrawals. If you have a non-US address you might have to file a form with your custodian to stop them withholding 30% tax at source. I don't know if the big brokers and mutual fund companies can deposit directly to non US bank accounts so you might just have to put the cash in a US based account and then transfer it to the UK. You'll get a tax form at the end of the year and then you can fill in your 1040 and pay the tax on the income you took from the IRA and tax a tax credit for that on your UK return.

aes1

Yes, I am a US citizen, as of last year! So I have dual nationality. I am complicating my matter further in that I intend going to England for a short time initially, using my sister's address as my residence. Then I am hoping to rent in Malta for six months (vacation), with the intent of deciding if I wish to stay there permanently. Wherever I live, I will not buy a house, only rent. So, I obviously am being very detailed and careful re my financial transactions, as I am adding a third currency of Euros into the pot!!!

J.J

aes1, I dont know the answer to this for it doesnt apply to me but have you checked if you leave your US house before it is sold and live elsewhere, can you then sell your US as your primary residence and get the appropriate tax circumstance ? Also if you left SC without selling your house would SC still claim state income tax on the basis you have kept a house there? It may be worth considering to avoid surprises.

aes1. nun, My plan for covering tax on future US sales of IRA or bank interest etc is to maintain a US $$ account so that I am not transferring $ / pounds back and forth. I've not decided yet if that $$ account would be mainland or offshore, e.g. Halifax Bank, it may hinge on where my IRA custodian can pay the funds to and I may start with US-side bank and switch to offshore e.g. Halifax later if it pans out..
It occurred to me that maintaining a convenience $$ bank account in the ex-US State of residence (NC in my case) may leave one susceptable for the State to claim that you have still maintained residence and therefore can still claim State tax, but having talked to NC if I sell my house and cars and surrender drivers license and cancel voting registration and advise my new address then I will be clear of NC State tax liability from the date I leave. This all helps me get my thoughts straight by simplify by check and check again to avoid surprises

aes1

I cannot see me leaving without first selling the house. Renting out will not cover my mortage. The only other alternative (not a good one morally, and may not even exist) would be to walk away. As for a bank account, I had intended keeping a US one for the same reasons you mention, also I don't know whether I shall end up needing £ and/or Euros. Do you have any knowledge of HSBC. I am considering using them, though it would probably have to be mainland.