US citizen living in UK: "Is it true I can’t invest in popular funds?"

You are far from alone in experiencing this unpleasant wake-up moment.

Your friend is broadly correct. If you are an American citizen, even though you may have lived in the UK all your life, you need to choose investments with care. This is because you will need to declare your holdings to US authorities. And yes, some investments can result in penal tax charges.

This article sets out to give you basic information. But if you’re a long-term investor with substantial savings, such as your pensions, or wealth which you hope to bequeath to your children, you may need to seek help from a professional investment manager.

So, you’re an “accidental American”

If you are US-born, unless you have subsequently renounced your citizenship, you remain a “US person” in the eyes of American officials – and with that comes a requirement to provide a range of financial information to the US authorities.

Not everyone knows that they’re subject to these requirements. Some people (such as those born in the US but who didn’t grow up there) don’t even know they’re “American”. They normally discover when they get notified by their bank or investment provider – or, as in your case, when they’re told by a friend.

The requirements can seem daunting at first, but there are a couple of broad principles that will help steer you through. If you discover you need professional help, it is available: you’re not alone.

There are three key requirements you need to know about.

1. Your investments. This relates to your longer-term holdings in stocks, shares and mutual funds. Do they meet US criteria? Or are they likely to attract severe US taxes? Do they need to be re-organised in order to make them more tax-efficient?
2. Your US tax return. Because yes, if you’re a US citizen – or “US person” in the technical language – you probably need to file one every year.
3. Your bank accounts. You may need to complete an annual form known as an FBAR. This is a “Foreign Bank account Report” or FBAR, which covers your bank-based cash savings.

1. What you need to know about investments if you’re a US person living abroad

Most investors living in the UK and elsewhere make use of mutual funds such as unit trusts or “open-ended” investment companies (OEICs) for their long-term investing.

The problem is that if you’re a US person, and are required to pay tax to the IRS, these investments can result in unnecessary tax.

That’s because the IRS categorises many such funds as “Passive Foreign Investment Companies” or PFICs, which attract punitive tax treatment. This can seriously impact your retirement savings and other long-term investments.

The answer often lies in the creation of investment portfolios undertaken by specialists who can avoid PFICs and use alternative holdings which will still meet your objectives in terms of long-term goals and risks.

2. Filing your US tax return as a US person overseas

The simple rule is that if you’re an American and had to file a return living IN the US, then you are still likely to have to  file a return even if you are living OUTSIDE the US.  It doesn’t matter if you don’t owe any tax to the US authorities, you still have to file.

As the Internal Revenue Service (IRS) puts it: “The rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.” And it doesn’t matter whether you have not lived in the US for many years, or indeed if you have never lived there at all.

Most US-based Americans do need to file a return, as the income threshold is comparatively low – depending on your married status, household makeup and other factors.

3. Who needs to file an FBAR – and when?

The FBAR requirement goes back to the 1970s but it’s only more recently that US authorities have tightened their enforcement of the rules.

The trigger to need to submit one is having an account balance of more than $10,000 at any point in the tax year. (That’s a total balance across all your “foreign” – eg non-US or overseas – bank accounts).

What you’re asked to supply is the total value of these accounts. For more official help on how to make an electronic submission, including details on how to file if you’re joint accountholders, with your spouse, the US Treasury publishes an FBAR FAQ.

Do you need to file an FBAR every year? If your level of savings exceeds the threshold for that year, the answer is yes.

In recent years a new law FATCA (Foreign Account Tax Compliance Act) came into force requiring financial institutions around the world to report the cash and investments held by US citizen account-holders back to the US authorities. At a stroke, this has made it easier for the US’s Internal Revenue Service to see who needs to file an FBAR.

US expat needing help with investing? Where to find out more

Schroders Wealth US Ltd is among a small number of global businesses which specialise in investment services for US citizens wherever they live around the world, focusing on investors with a minimum £1 million or currency equivalent.

Read our guides to find out more about why it is so difficult for US citizens to invest while living overseas.  We also publish a comprehensive US expat financial jargon explainer.

Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.