It’s an attractive premise: in a shrinking world where careers and family life can span continents, why not spend half the year in one place and half the year in another?
This is a luxury which the Duke and Duchess of Sussex are working on to make a reality, but you need not be a royal to make it happen. Whether you are a corporate executive overseeing an international business, an entrepreneur who enjoys the flexibility of residing in two places, or you simply enjoy spending time in two countries, there are many who make this lifestyle theirs.
But for those who want to split their time between the US and the UK, a situation we encounter frequently, there are several things to consider before booking those flights and securing that second home.
Making it work
The actual mechanics of spending time in two countries each year is not particularly complex – as long as you meet the immigration requirements. Assuming this to be the case, the real challenge is in managing assets and ensuring compliance with tax authorities.
If different wealth managers are taking care of different pots of wealth around the world, you may end up with an incoherent and disjointed approach that brings with it a whole host of problems. Too often, each manager treats the accounts they look after as if they are mutually exclusive. For instance, the US investment manager looks after only the US accounts, such as IRAs and ROTHs, a different investment manager supervises any offshore assets, while a local UK manager will cover the domestic piece. You see the problem emerging here?
You need to consider whether your assets are being managed so that they fit into a broader, harmonious wealth plan. Eliminating silos is a priority and ensuring that everything slots together is paramount. This not only means avoiding unwanted concentrations and overlaps, but also making sure assets and product wrappers are being used in the most efficient way in terms of currency exposures, tax issues and capital gains.
Take a Global approach
With issues such as currency movements and different tax rules all affecting an investor’s bottom line at the end of the year, it’s important that a global portfolio is managed to make the most of all these factors.
The problem with being an American living in the UK is that both HMRC and the IRS want their share of the pie. And that share of the pie is always in their local currency. This makes planning your capital gains position quite tricky. A £12,000 gain in the UK to utilise your CGT allowance could quite easily be a $100,000 short term gain in the US.
IRS – The IRS have the dreaded PFIC rule, if your fully “UK compliant” portfolio of funds isn’t incorporated in the US, the IRS will tax everything as ordinary income. To compound the matter the IRS won’t even recognise your UK compliant wrappers, such as an ISA, and will see straight through.
HMRC – The UK doesn’t have the PFIC rule, but they do have the reporting fund regime. If your fund isn’t on the list of UK reporting funds released HMRC will tax you at your marginal rate of tax instead of CGT. A difference of up to 25%
If funds are out of the question because of the punitive tax consequences, this leaves you with direct securities.
Because of this, wealth managers of international families must look globally and understand the implications of investment decisions in every reporting country.
Getting to grips with Reporting
Managing assets in multiple jurisdictions involves considerable administration work, but providing all the necessary accounting information is fundamental to the process. For Americans living in the UK, the importance of detailed reporting to the UK tax authorities of US investment activity can’t be emphasised enough.
When it comes to reporting US account activity during the UK tax year, and vice versa, investment managers need to ensure that foreign exchange rates are all logged and correct. Any loss reported in the US could in fact be a gain in pound sterling terms.
Historically, wealthier US citizens living in the UK paid tax on the remittance basis in order to avoid this reporting headache, but changes to non-dom rules are putting an end to this approach.
When transparency and compliance are on the rise, investing the money is just a part of process, so ensure your wealth manager has a handle on your global wealth planning, effective portfolio management and consolidated global reporting.