Embarking on a life lived outside of your home country is an enormous undertaking. From applying for visas to moving and settling in, there are many things to be considered. As an American, moving abroad gives rise to a unique set of challenges by having to file a US tax return wherever you live in the world.
For wealthy Americans, one of the most common routes to qualify for leave to remain in the UK is through the Tier 1 (Investor) Visa. To be eligible, there is a requirement to invest at least £2 million in share and/or loan capital in actively trading UK-registered companies. After five years, an individual can then apply for indefinite leave to remain in the UK, which can be accelerated to three years if £5 million is invested or two years if £10 million is invested.
It sounds simple, but there is a lot more than meets the eye when you overlap the Tier 1 rules with Uncle Sam’s requirements (that’s the biggest challenge!).
Multiple tax returns
In reality, an American who moves to the UK will face the onerous task of complying with two different regulatory environments. In part, this will mean filing a UK tax return as well as a US tax return; but it will also mean that any investment decisions made in the UK will have to be compliant from a US perspective in order to avoid any expensive pitfalls. Add in the additional burden of managing this using two different currencies, this can quickly become an overwhelming experience.
Gone are the days where you could simply park your money in the “safety” of UK Government Bonds to tick the investment criteria box. Since the rules changed on the 29th March 2019, which omits UK Government Bonds from the already exhaustive permitted investment list, it has now become a requirement to take on more risk assets.
Making it work
For many American families, it begs the question: how does this pot fit in with their wider wealth planning?
All too frequently we see the funds apportioned to the Tier 1 (Investor) Visa treated as mutually exclusive and segregated as an isolated part of an investor’s global assets. This fragmented approach can lead to unintentional consequences. For instance, having individual strategies in different investment accounts may contradict each other or leave a higher allocation to certain asset types/underlying securities than planned.
The Tier 1 (Investor) Visa portfolio should be included alongside an investor’s global assets within a singular strategy. By removing the jurisdictional constraints and looking at the overall picture, the Tier 1 (Investor) Visa portion can be used to enhance a strategy rather than segregate it.
Once the investment criteria has been fulfilled within the required three months of arrival, all capital must remain invested and the level of investment maintained. Investors can take an income from the portfolio but they are only permitted to remove interest accrued and dividends declared after they have been purchased.
Taxation in the UK primarily depends on a person’s residence status determined by the Statutory Residence Test during the UK tax year (6th April – 5th April.) An individual resident but not domiciled in the UK can elect to be taxed on the remittance basis where non-UK income and gains are only liable to tax when remitted into the UK.
This is important as any additional funds remitted into the UK, such as for professional fees or lifestyle purchases, can be taxed punitively, hence the need to incorporate these into the planning prior to a move.
It is therefore imperative that, when constructing a portfolio, any income requirements of the investor should be considered. By constructing the Tier 1 (Investor) Visa portion coherently alongside the investor’s global affairs, an appropriate level of income-generating assets can be purchased, allowing income to be taken in a tax-efficient manner.
And then there’s reporting…
As mentioned above, an American resident in the UK is required to file tax returns to both HMRC in the UK and the IRS in the US. The US reports are in USD and on a calendar year basis whereas the UK reports are in GBP and from the 6th – 5th April.
In reality, this can be quite a cumbersome process as all activity within the Tier 1 (Investor) Visa portfolio will need to be converted into USD. This can become especially troublesome when considering that the US logs short and long-term capital gains differently to the UK. Together with the volatile nature of currency movements, this can become an expensive exercise. Ensuring that this is provided to both the US and UK accountants in the correct format and timescale can create huge time savings for them and therefore cost savings for the investor.
The Tier 1 (Investor) Visa is a fantastic way to move to the UK. However, to avoid turning an exciting move into an investment and tax nightmare, it pays to ensure the investment is properly thought through to maximise the outcome.
By Josh Moss, Associate, London & Capital