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Tax efficient investing for Americans in the UK

By February 13, 2019Investments

For an American expatriate in the UK, a UK pension can provide a solution to meet the tricky objective of tax efficient investing. For a British expat in America, you can find out more about the UK pension planning opportunities here.

An expat in the UK can contribute to a UK pension and receive UK tax relief on the contributions. The pension pot can then grow tax free and when you come to access the pension, 25% of the pension may be tax free. This however depends on your individual circumstances and you should seek specialist tax advice on this matter. Those three tax benefits alone make a pension a very attractive proposition for an American investing in the UK. However, another advantage that is a more recent feature of UK pensions is the possibility to pass your pension on tax free to your nominated beneficiaries if you die before the age of 75, and at the beneficiary’s marginal tax rate if you are over 75. When you consider the US estate tax threshold is $11.18m for a single person but only £325,000 in the UK, with the possibility of slightly more if you can utilise the main residence nil-rate band, you begin to see why a UK pension has an additional tax benefit that you might not have originally considered. It is worth noting that for sizeable US estates, i.e. those with a value exceeding the exclusion threshold (currently $11.18m), there may be US estate tax due on death. In addition, the US tax position for the beneficiary who will ultimately start drawing the pension, will among other things, depend on the residency position of that particular individual as well.

There are many factors that need to be considered before contributing to a UK pension, which not only affect how much you should contribute from a UK perspective, but also from a US perspective. You should also take into consideration whether the pension provider is happy to work with a US citizen both in the UK and in the US if there is a chance that you might move back in the future. Many pension providers choose not to offer their products to US residents, and this can create issues down the line. These are just a couple of points to bear in mind as an American undertaking pension planning in the UK. There are other aspects to consider such as the currency and income distribution planning for your pension so that you can try to mitigate exchange rate risk and take income from your pension in the most tax efficient manner.

Cross Border Financial Planning take all of this into account when looking at the possible opportunities that a UK pension can provide for a US connected individual. If you would like to get in touch to find out more, please feel free to email me at ecole@cbfp.co.uk.

Supplied by Edward Cole, Financial Planner at Cross Border Financial Planning.