Talking Expat Taxes #18

Welcome to another episode of Talking Expat Taxes. Very excited to have Luke Papalias on today, and We're gonna talk about a topic that has been, you know, a big part of what I've done over the past several years, which is working with a lot of UK clients in particular, but it has a much broader implication to that than just the UK, in some instances.

But we'll talk a lot about the specific UK/US concepts with, specifically with investments. So, I'll let Luke introduce himself and tell more about exactly, what he does. So Luke, glad to have you on. Appreciate you coming,

Yeah, so I was thinking maybe just to start off, just give a little bit of background into your history, what qualifies you to talk about, to talk about US/UK, investment, advice and that sort of thing. So a little bit of background.

Okay, very cool. I don't know why I never picked up... I just assumed you were from the UK. Now that you say that, your accent, it's very obvious to me.

Yeah, and Australia has, there's as many issues with Australians moving to the US and the superannuation funds, which we can get into a little bit too.

So tell me, tell us a little bit about where you're working now, what you do, who you work with, and then we can dig into some of the fun stuff.

Interesting. Just to paint a little picture of, like, the type of clients that I see, UK person moving to the US, they become US taxpayers, and they leave the UK tax residency net at some point during that transition. But there's always the question of what do we do with the assets, right?

Like, how do you start investing in the US, stop investing in the UK? So when you say you're dual licensed, that means that if a UK person has a SIPP or an ISA or something like that in the UK, you can manage that for them as well as help them start investing in the US. You can do both.

Right.

Yeah, so let's talk about that a little bit with the PFICs. I mean, the biggest problem that I see, and probably that you see with, US taxpayers that have UK or really international investments in general, but UK in particular in this case, is if they're invested in non-US mutual funds, that triggers this PFIC regime, and I'll quickly explain it.

Basically, PFIC stands for Passive Foreign Investment Company. Mutual funds fit that definition because they are by definition corporations, foreign corporations whose assets and income are all passive or majority passive. So that falls into this PFIC regime, which is not great, actually terrible from a US tax perspective 'cause you're taxed at essentially 37% is under the default excess distribution regime.

There's interest charges and things like that, and it's doubly bad because if you're in, say, an ISA in the UK, which is, what does that stand for? Investment savings account. Um, there's no tax in the UK on those, so you're just getting this one tax charge from the US. So the entire point of this investment in the first place in the UK was tax deferral.

You've now lost that as a US taxpayer because you're gonna be paying tax on it and at a bad rate. So yeah, they're pretty ugly, and so that's, to me, that's one of the biggest values of working with someone like you, is you understand the US implications of the investments people are making in the UK.

And that's the biggest trouble that I run into is if we're not communicating ha-having someone that understands even if you're not like a un- you're not obviously preparing US tax returns, but you understand the implication of what a PFIC is, and we need to avoid this thing at all costs.

It's, it's really, that's like number one, like UK/US financial advice is avoid PFICs. That's kind of number one.

Mm-hmm. Yeah, 'cause that's one thing, 'cause usually I don't have the benefit of working hand in hand with an investment advisor, especially not one that knows the US and UK rules. So a lot of times, like a client comes to me and they've already moved to the US from the UK and say they have an ISA or, or an investment account in the UK, and it has four mutual funds in it.

So in that scenario, what I'm having to do is trying to figure out, all right, how do we get out of these things? Do we not? The strategy depends on what the intention is of the client, right?

Are they, are they here to stay in the US? Is it gonna be a temporary thing?

In which case there's no easy way to get out of a PFIC. The only way to do it is to trigger a sale in the US basically. So like you said, do it before you leave the US or come to the US or find some way to get out of it later. Let's back up a little bit.

So what's a typical client that, that you work with? What's a typical scenario?

Yeah, that makes sense.

And then, so from an investment perspective, what's the general advice there with people that have like retirement accounts? Let's say most of their retirement is in the UK, but they're now living in the US. Are you trying to get assets into the US? Or what's the I mean, I'm sure it depends on the scenario, but I'm

what's the,

Less flexibility,

you know they're not gonna stay in the US or something like that. But honestly, even then, it's not a bad deal, right? I mean, what I always tell my non-resident clients, the US is the best, is one of the biggest tax havens in the world. If, as long as you're not a citizen, right?

Like, I mean, investing in the US as a non-resident's a great deal. No capital gains tax. Depending on where you are, low dividend taxes, no interest tax.

Yeah. You know, I just had a call with a client a couple days ago. He was actually in the Netherlands. He was born in the US and he moved back to the Netherlands when he was, like, a baby. Never knew he was a US citizen, and then he like, this is a typical, like, accidental American scenario, right?

And so he goes to a bank when he's, like, 20 years old and tries to get a loan or bank account or whatever it was. They find out he's a citizen. They tell him, "Nope, we're not working with US citizens." And he's, he didn't even know he was a US citizen. The bank told him somehow or another. But then, so then he found out he couldn't get bank accounts in these places, and now he's dropping his citizenship in the US is the plan.

I was curious, are you running into many people that are having trouble... Ooh, this just made me think of another point I need to bring up. But are you running into people that are having trouble in the UK, as US citizens getting accounts and things like that? And then the flip side of that, just so I don't forget to ask, is people outside the US with US accounts.

Like, one of the main values of what you do is working with expats. You know, like you can work with a US person in the UK, whereas I have clients that Schwab tells them, "You gotta get, you have 60 days to get your IRA out of Schwab 'cause we found out you live outside the US," which is a huge problem. But let's tackle the first one first, FATCA.

Are you running into any client scenarios where US citizens are having trouble getting accounts outside the US?

Is it just, and is it just the paperwork involved? Is that really what it comes down to? Which I think is the same problem on the US side, not dealing with US expats

Right. So, you can help like just a US expat living in the UK, which, in which case I still recommend even not as an investment advisor, if you're gonna make investments, do it in the US in that case. We have to, we still have to figure out the UK tax because the UK has their own version of PFICs that I don't fully understand, very well.

But, I don't think it's as big a deal as the US one. That's like a very loose way of putting it.

Right. Yeah, definitely. On the US side of things, I guess that's a really important point, though, that you're able to help, these people that, can't get the accounts that they need in the UK and you're able to manage those investments. But also on the US side, like if there's somebody that's a US citizen and they move outside the US, that's one of the crazy things that I've found with clients is, there's no consistency with when a US bank or financial institution shuts somebody out of the system.

Like, if they move to the UK, there's no consistency with it, and I think it's just, the, the decision of the actual, like the branch of the bank. It might not even be the whole entire bank itself. But how do you deal with those clients?

Obviously you only, are licensed to manage, assets in the UK and the US. But what if you have a client that lives in Australia or Costa Rica or something like that? Are you still able to help those clients, or are there certain countries that even y'all don't work with?

So you're able to, help manage and it doesn't matter what country they're in necessarily. I mean, generally the advice for US citizens is as far as an investment goes, unless you're planning to exit your US citizenship one way or another, keeping your investments in the US, is a much better way to do it just 'cause it's more flexible.

You're not having to play these PFIC games at the end of the day like you would

Yeah, definitely.

So, let's talk a little bit about like the I did wanna dive into a little bit like the products, like specifically with the UK and the US. You know, we deal a lot with people that have, the retirement plans in the UK, the SIPP and the ISA. I was just gonna...

I mean, A lot of these things have a lot of gray area, right, as to how they're, how they're classified for US tax purposes. And I'm probably, there's probably, you know, you could probably ask five people this question and get four different answers at least as to like how the US is going to treat SIPPs and ISAs and things.

And actually, I just had a client, that I'm working with now that one of the complications she has, she lives in the UK, she has investments in, I think it's a SIPP that she has investments. And the SIPP is typically a better deal from the US perspective because at least it's a retirement account, right?

so then we get the treaty benefits where, yeah, it may still be a foreign trust foreign grantor trust where we have to file Forms 3520 in the US, so it's a little bit of additional compliance. But we don't have to look through to the underlying assets and pick a, and then we don't have PFIC problems.

Whereas the ISA's a different story. At least my position on the ISA is it's more like an investment account.

So we're not, we're not treating it like a retirement account. Is that generally the way you see it treated?

Right

All right, so I'm gonna talk one more... So this part's a little trickier, I think, but that's trying to get, like let's say you have a client one person you mentioned is like a US citizen that spent, you know, a decade in the UK working, and then they move back to the US and they're gonna stay in the US, but they have, several hundred thousand dollars or something in UK requirements.

Getting those assets to the US, one thing I'm working through now with clients is the UK lump sum distribution rules. I know you're not a tax expert, but you run into these same problems that, that I

And it's like, yeah, we can, you can get it out of the UK tax-free, but the US is still gonna tax it coming out.

I mean, have you personally found it worth it in like broad stroke trying to move UK assets to the US or does it really just depend

What is the benefit of doing that? Let's say somebody has a SIPP in the UK, and we know they're gonna stay in the US for a long time. Is there really a downside to keeping that, just keeping the money in the SIPP and opening up something else in the US if you're still working, whatever it is, or just waiting?

I mean, I'm pretty sure what the UK-US treaty says is you're gonna pay tax on the dividend, on the distribution in the resident country,

Right. See, I think that's a huge benefit to people 'cause like, you said, fees is a problem, but if somebody has a SIPP in the UK and moves to the US and they wanna get a financial advisor to start managing US stuff, they're gonna have to keep their UK advisor to do that part 'cause it's not gonna ever really make s- I mean, never say never, but moving the SIPP to the US is not really an efficient

'Cause you're not subject to the PFIC stuff, so it's tax deferred either way. You're still getting tax deferral in the SIPP, so

Ah, so like the opposite scenario of the US

situation.

Okay. I'd never actually heard that before where people... Probably 'cause a lot of my clients keep a UK address, and so they probably do the same thing my US clients do. They just pretend they still live in the US and they move

that strategy. , But it's not a foolproof strategy, I guess is the point, because there's ways, first of all, there's ways for them to know that you don't live in the US. But, but yeah, using your... I imagine they do this, people do the same thing in the UK they do in the US, use their parents' address or whoever, brother's address in the UK so they can keep their SIL, and nobody ever asks any questions.

And that probably works 95% of the time to do it

Right.

Yeah, 'cause I mean, at the end of the day, like you can play that game to keep the sip there, but you still need to be able to ask people questions, and the answers to your questions have to include the fact that you're now a US tax resident. If you leave that part out of the, out of the situation, then you're not getting good advice.

There's just no way. So you really need somebody that can do both, or at the very least two people that are able to communicate intelligently with one another, which is harder than just having one person at the end of... Um, 'cause that, I mean, that's a lot of what I do really, is coordination.

You know, when it comes to US people living outside the US, I need to have qualified people in their own camps, so UK tax people that I work with, US-UK advisors like you, so that we can put our heads together and figure out the right solution, 'cause nobody knows everything,

And that's, that's where you need to be careful when people say they do, you know?

Yeah, for sure. All right, cool.

Well, hey, look, this is really interesting stuff, and I think it's really important that people understand people like you exist, you know. If you're a US citizen, definitely if you're moving to or from the US, um, tax advice, financial advice is important and potentially complicated, um, but it needs to happen sooner than later, you know?

So get in touch with me. I can get you in touch with Luke and the right people. But yeah, maybe tell people a little bit about how they can find you, where to look for you, and we'll of course include, your information in the show notes here so that people can look you up and reach out.