As an American moving to the UK, navigating investments across two tax systems can be complex. Planning around the US and UK tax pitfalls, relating to investments outside of each respective jurisdiction, is important. The case study below covers these issues and explains how our advice saved Ian £34,000 in tax.

Case study: How Ian saved £34,000 in tax

Introduction

Ian is a US Citizen and planned on moving to the UK with his family for at least five years. He held a $750,000 US-based investment portfolio (stocks, bonds, mutual funds, and ETFs) and wanted to remain tax-efficient, while also bringing some of his USincome and gains with him to purchase a UK property and re-invest in the UK. By seeking advice before arriving, Ian avoided several common pitfalls and made informed decisions that ultimately saved him £34,000 in tax.

Planning ahead: The new foreign income and gains regime

From 6 April 2025, the UK introduced a new tax regime for individuals who have not been UK tax residents for the last 10 years. Known as the Foreign Income and Gains (FIG) regime, it allows qualifying individuals to exempt overseas income and gains from UK tax for up to the first four tax years of UK residency, regardless of whether funds are brought into the UK. Ian qualified for FIG and, with our advice, structured his investments to maximise tax efficiency during those four years. However, since FIG ends in the fifth tax year, planning for the transition early is critical. Ian will still be required to file UK tax returns to be able to claim the exemptions in his first four years of residency.

Avoiding UK tax on non-UK funds

The UK tax rates on the disposal of non-UK funds can either be at the preferential capital gains tax rates, or the higher income tax rates. This is dependent on whether each fund is considered to be a reporting fund or a non-reporting fund. Any gains on disposals of non-reporting funds while a UK tax resident are known as offshore income gains (OIGs) and are taxed at the higher income tax rates. 

Ahead of Ian’s 5th tax year in the UK, we reviewed his holdings in mutual funds and exchange-traded funds. We were able to advise which of these would be considered non-reporting funds and that he should consider selling them before the FIG regime expires for Ian. The gain on the disposal of these non-reporting funds totalled £120,000, and selling while still qualifying for the FIG exemptions saved him £25,000 in tax, compared to if he had sold these in his 5th year of UK residency.  There was still US tax due on the gains, and the tax saving was a result of avoiding the gains being subject to higher UK income tax rates.

Capital gains on shares

We also advised Ian that the way in which capital gains are calculated on the sale of shares differs between the US and the UK. In general, the US uses a First In First Out (FIFO) methodology. This means that if a disposal of shares is made that has various purchase dates, the earliest purchases are deemed to be sold first. Conversely, the UK uses an averaging method of all purchases of the shares to determine the cost basis. This difference in treatment between the US and the UK can cause a mismatch in the capital gain calculated in each jurisdiction.

Exchange rates

Additionally, we explained to Ian that movement in the GBP/USD exchange rates are a consideration. From a UK tax perspective, the capital gain must be calculated in GBP. This is done by converting the cost basis and proceeds at the respective GBP/USD spot rates as on the purchase and sale dates. This means that the movement in exchange rates can have an impact on the level of gain or loss that is taxable in the other jurisdiction. It can even be possible for his investment to be in a loss from a US perspective, but a gain position in the UK due to the movement in exchange rates.

Before the FIG regime expires for Ian, we also performed some calculations and advised that due to the movement in the GBP/USD exchange rate, some of his investments that had grown very little in USD, resulted in gains of £20,000 from a UK point of view. He therefore may wish to sell these prior to his 5th tax year of UK residency, avoiding a UK tax liability of up to £9,000.

US tax traps: UK investments and PFICs

As well as using the money brought to the UK to purchase property, Ian also wanted to start investing in the UK in a tax-efficient way from both the UK side and the US side. For the first four tax years that Ian is in the UK, we suggested that he may want to consider only investing outside of the UK to make use of the FIG exemptions. This would ensure that the income and gains from the overseas investments are taxed only in the US, which may be more tax efficient, and would avoid having to consider the UK tax pitfalls for those years.

In Ian’s 5th year of UK residency, the FIG regime would no longer be available, and so at this point, Ian may want to consider investing in the UK as well as in the US. This is when we encouraged Ian to ensure that the investments are tax efficient in both the US and the UK. Like the UK, the US has rules that relate to investments located outside of its jurisdiction. A Passive Foreign Investment Company (PFIC) is any non-US company or non-US investment trust where the majority of its income is generated from passive sources (e.g. interest, dividends, gains etc.) or the majority of the assets held are passive in nature (e.g. investments). Investing in these products may result in punitive taxation. 

PFICs are not only heavily taxed, but there are also significant annual US compliance requirements when it comes to these types of investments. PFICs are required to be reported on Form 8621 as part of a taxpayer’s US tax return. A separate form is required for each PFIC held during the year, even if no distributions or gains were received from the investment. 

Without seeking professional advice, Ian could have unknowingly invested in PFICs. However, with our advice, Ian was able to avoid these products which ensured his investments stayed tax efficient in the US and avoided significant annual filing requirements and compliance costs.

Individual Savings Accounts (ISAs)

Ian was aware of UK ISAs and told us that he wanted to invest within these accounts as they offer UK tax free growth. However, although these accounts are tax free in the UK, they would still be taxable in the US, and if a stocks & shares ISA was used, there may be PFIC implications with the underlying investments.

Our expatriate tax specialists worked with our financial planning specialists to discuss the PFIC issues with Ian, and provided Ian with a comprehensive financial plan to follow, which enabled him to invest tax efficiently from both a US and UK tax perspective. 

Tax planning opportunities 

• Year-end planning 

We advised Ian that annual year-end tax planning may be required for him to avoid double taxation. In particular, the US allows foreign tax credits to be claimed on a paid basis, which means the date on which his UK tax is paid is very important. If the tax isn’t paid at the right time, Ian may not be able to claim the foreign tax credits in the corresponding tax year to when he received the investment income and gains, which could result in double taxation.

• Accrual basis

It’s possible to elect the accrued basis for foreign tax credits purposes in the US. Ian had not previously elected the accrued basis, but if he ever did in the future, foreign tax credit planning could get trickier. If the election is ever performed, the dates in which Ian makes any capital disposals would then be very important. The investments would ideally need to be a sold at a time when there is an alignment between the US and UK tax years, which would allow a foreign tax credit to be claimable at the correct time.

• Gifting

Another planning opportunity is gifting, including Ian gifting some of his assets to his spouse. The UK taxes individuals separately, and it's not possible for spouses to file jointly, so gifting can be a good way to utilise the lower tax rates and thresholds for both spouses and therefore optimise their joint tax position.

How we can help

Investments are an important part of your life and future plans, so we are here to help. Our dual-qualified US/UK tax experts can review your investments and provide clear, personalised strategies to optimise your global tax position. Together, with our financial planning specialists, we deliver integrated financial and tax planning tailored to your goals.