PFICs and UK “Non-Reporting” Funds: What Americans Should Understand Before Moving to the UK

For Americans preparing to move to the UK, one term that often comes up is Passive Foreign Investment Company (PFIC). While the PFIC tax regime has been part of the US tax code for many years, its practical impact frequently becomes apparent only once an individual starts planning how and where to invest after relocating abroad.

As awareness of the adverse US tax consequences and investment restrictions associated with PFICs has increased, more Americans are factoring these rules into their pre-move planning. What is less widely appreciated, however, is that the UK tax system presents a parallel challenge. Under UK rules, foreign investment funds that are classified as “non-reporting” can be subject to significantly higher tax rates than those that meet UK reporting requirements.

For Americans moving to the UK, this creates a planning tension. Investing outside the US may expose a portfolio to PFIC treatment under US tax rules, while continuing to invest through US accounts can result in holdings that the UK treats as non-reporting. Without advance planning, it is easy to fall into one regime while attempting to avoid the other.

So, what is the best way to navigate this?

How these issues should be addressed depends heavily on an individual’s circumstances and intentions. Someone who expects to be in the UK for a short-term assignment may need a different strategy from someone planning a long-term or indefinite stay, and different again to someone who will be under the Foreign Income and Gains (FIG) regime.

For example, an individual may move to the UK already holding a non-UK reporting fund and intend to remain for only a few years. If that fund is ultimately sold after UK tax residency has ended, the UK reporting status may never become relevant. However, if plans change—perhaps the stay is extended, or the investment needs to be changed —the tax outcome can become significantly less favorable, with gains potentially taxed at rates of up to 45%. The risk is that the investment decisions start to be led by the tax outcome, not whether the investment itself is the best option

Pre-arrival planning matters. Understanding where to hold investment accounts and which structures are likely to be efficient both immediately and over time is an important step of the investment process. These decisions often determine whether non-UK reporting funds or PFIC exposure will arise at all.

In cases where a US account remains the most suitable option—or where existing US accounts are retained—it becomes important to review not only the account itself, but also the types of investments it holds.

Although many pooled funds in both the US and the UK can be tax-inefficient for Americans moving to the UK, there are US-registered investments that are UK reporting, which can help bridge the gap between the two tax systems. It is also possible to avoid these issues by investing in individual stocks and bonds. However, depending on the size of the portfolio and the time and resources available for research, this can potentially create other issues such as increasing the investment risk through a lack of diversification.

Non-UK reporting funds and PFICs are just one aspect of the broader financial planning considerations Americans face when relocating to the UK. Currency exposure, retirement accounts, and long-term residence plans all play an important role. Over the past two decades, movements between GBP and USD have been significant, meaning long-term outcomes can vary widely depending on where retirement ultimately takes place and which currency dominates a portfolio.

While the interaction between US and UK tax systems can make investment planning more complex, it should not deter someone from making smart financial planning decisions. Cross Border Financial Planning USA specializes in creating flexible financial plans, with cross-border tax considerations factored into the investment process. If you would like to find out more about pre-arrival planning, please email Edward Cole at ecole@cbfpusa.com.

Cross Border Financial Planning USA LLC is an investment adviser located and registered with the U.S. Securities and Exchange Commission (“SEC”). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. Cross Border Financial Planning USA LLC only transacts business in states in which it is properly notice filed or is excluded or exempted from registration. A copy of Cross Border Financial Planning USA LLC’s current written disclosure brochure which discusses among other things, Cross Border Financial Planning USA LLC’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.