Investment options for American citizens living in the UK

Due to certain rules and regulations, Americans will have limited access to US-based investment platforms, therefore exploring alternative options is essential for portfolio diversification and effective retirement planning. 

What’s more, Americans are subject to US tax on worldwide income, including investment gains, which means navigating double taxation, avoiding punitive tax treatment on certain investments and complying with all relevant laws is crucial.

This article has been written based on a webinar we recorded in October 2024 in which we were joined experts Patrick Mulhern from Tanager Wealth and Scott Wickham from Tax Advisory Partnership, who shared an overview of both the various investment options and opportunities available to Americans living in the UK as well as the key tax implications to be aware of when choosing any of these options. 

Please be aware that no information in this article constitutes advice and you should always seek professional advice before making any financial decisions.

Watch the webinar in full

Why is it so difficult for Americans to find a company to assist them if they have below $1 million to invest?

Investment advice between the US and the UK is a specialist space, exposed to two different jurisdictions. In some ways, there’s the ghost of a third jurisdiction as well, with some lingering regulations from the EU. Therefore, for full-service wealth management, it's difficult to balance keeping minimums low while still carrying out the required amount of due diligence and compliance checks.

It becomes exponentially more difficult when you must be compliant with regulators in multiple countries. If you’re an advisory firm with less than 1% of your revenue coming from overseas clients, you might find these are taking up 40% of your compliance work. Therefore, you can see why it’s easier from a business perspective to simply choose not to serve that tiny percentage of people. But, of course, the knock-on effect is that fewer and fewer services are available to US citizens in the UK.

The lingering EU directives which came in just before Brexit make it difficult for US investments to be sold to EU residents without jumping through a lot of hoops. This puts people in a bind where being a do-it-yourself investor isn't possible, because they can’t buy the investments they need. 

Therefore, to be a firm that successfully serves this niche, you need an army of specialist services.

What investment options are available to Americans living in the UK?

As an American citizen in the UK, you’ll need to use different investment tools from the standard, off-the-shelf solutions. While it may be more difficult for you, there will be a way to get the outcome you want. 

A typical interaction between Americans with money to invest and UK based wealth management firms would begin with: "I know I can't invest because I'm American, but I'm trying to think about what my options are”.

Ultimately, it’s not that Americans can’t invest, it’s that you have to be careful what you invest in.

As an American who is resident in UK, you have two choices. You can open your investment accounts here in the UK, or you can keep your investments back in the US. 

Neither of these options is bad or good. Both have pros and cons depending on your specific situation and how much money you have to invest. 

If you have pension in the UK, or an IRA or 401(k) back in the US, they will have different rules. The dual tax treaty between both countries tends to be favourable towards retirement accounts, but you have to keep them where they are. For example, you can't pick up an IRA and move it over the UK. Therefore, the question of where to keep those assets answers itself.

Let’s say then, you have money to invest from savings, inheritance or business sale. You could choose to open a general investment account or an ISA here in the UK and invest through that route.

The problem with this option is that because American citizens are taxed on a global basis, you will have to report the income, dividends and capital gains inside the investment account back to the IRS on your tax return. 

This means most investments available to you in the UK are going to fall into a punitive tax regime, and any capital gains you make will be taxed at the highest income tax rate in the US. This is the case whether you've sold or not – just your investments rising in value and making a profit will be substantially taxed by the IRS.

Effectively, as an American citizen in the UK, this means you’re limited to buying individual stocks or bonds if you don't want to fall into a penalty tax position. And of course, this means you have to be comfortable with buying individual stocks. There will also be stamp duty involved when you're purchasing them inside of a UK account, as well as an ongoing maintenance cost.

Individual bonds can also be extremely hard to buy in bulk with good enough diversification unless you have £5-10 million to invest, because then you can buy enough bonds in bulk to get a decent price on the trades. For your average investor, this isn’t an option. 

Another alternative is to consider US-based investments such as a traditional US brokerage account. The downside here is that you’re in the UK and your account is in a different jurisdiction. While this will create some complexity, it can be offset by the fact that there are more advantageous ways to invest in the US and it simplifies reporting for your US Tax returns – just not your UK ones.

This brings us to the question of how HMRC sees US investments, and what problems you might face investing inside a US platform. The UK doesn't love foreign collective investments like mutual funds and ETFs and – in many ways – tries to shoehorn you towards using individual stocks and bonds.

Unlike the US though, the UK does recognise reasons you might want to invest outside of the UK – such as investing in US-based funds for tax simplification. Therefore, there is scope for you to invest in US accounts and to utilise a small set of funds called the Reporting Funds List, published by HMRC.

In summary, when done and monitored properly, you should be able to build an investment portfolio which avoids the twin "bugaboos" of either a double tax or penalty tax position and that sets you up for whatever goals you're trying to achieve in way that's cost-effective and gets you good diversification.

For these investment options, what are the key tax implications US citizens in the UK need to be aware of? 

Any UK investment which is a fund as opposed to individual stocks, including stocks and shares ISAs, is regarded as a Passive Foreign Investment Company (PFIC) in the US. These are taxed at punitive rates of 37% – the top rate of tax in the US. What's more, if you held shares over a period of several years, the gain is deemed to accrue over the holding period. 

For example, if you had a £10,000 gain over a 5-year holding period, £2,000 would be allocated for each year and taxed at 37%. An imputed interest charge would also apply to each of the earlier years, which means you could be taxed between 40-50% on the disposal of units within an ISA. For that reason, most people tend not to invest in stocks and shares ISAs.

Similarly, there are certain non-UK investments which are regarded as non-reporting funds, and which get taxed at income tax rates. Therefore, if you're a higher rate taxpayer in the UK, any gains from the sale of stocks within a US-based ETF or mutual fund that’s not a reporting fund could be taxed at up to 45%. This is one reason why people may not want to invest in those as a US citizen in the UK. 

When it comes to reporting on investments, you also need to be aware of the different tax years in the US and UK. The US tax year follows the calendar year, whereas the UK tax year runs from 6th April to 5th April. Therefore, if you were to dispose of gains in November and losses in January, those would be within the same UK tax year, but two different US tax years. 

Exchange rates are also important to consider. Recently we've seen the pound drop against the dollar, though it's starting to come back. If you are realising gains, whether in sterling or dollars, you need to factor in the exchange rates between the two dates when reporting on the other return.

Another point when it comes to reporting is that if someone recognises a gain today (October 2024), this falls within the 2024/25 UK tax year and means the UK tax on that gain won't be payable until 31 January 2026. However, if you’re resident in the UK and the UK has primary taxing rights, you will want to claim the tax credits on your 2024 US return. Therefore, you would need to pay your UK taxes no later than 24 December 2024 to get the credit on the corresponding 2024 US return. 

In this case, you would end up paying the UK taxes 13 months ahead of time. While this isn’t ideal from a cash flow perspective, it’s a definite way to avoid double taxation. Whereas, if you don't pay the UK tax until January 2026, you may forever lose the ability to claim a credit for that UK tax on your US return.

A general rule of thumb is that any income you receive which is going to give rise to a UK tax liability in the future – whether it's income or gains – the UK tax needs to be paid in the same calendar year the income was earned to avoid double taxation. Sometimes though, foreign tax credits can be carried over so that you don’t have to prepay your UK taxes.