Moving to a new country is exciting. But it may also be daunting as it requires many new undertakings, such as finding a place to live or opening a bank account, which can quickly become time-consuming and frustrating. Unsurprisingly, many leave the often complex financial and legal matters for a later date. The cost of doing so, however, can be high.  To save time and hardship, Cross Border Financial Planning USA has put together 10 financial matters to consider when moving to the US. Whilst this brochure focuses on the intricacies of moving from the UK to the US, many of the same or similar principles apply when moving to the US from other countries.

 

1. Reporting and paying tax

In the UK, most people only pay tax through the Pay As You Earn (PAYE) system, whereby tax is automatically deducted from their pay cheque and often there is no need to file a tax return. Although the US tax system is also Pay As You Earn, most people are still required to file a tax return each year and it is the individual’s responsibility to make sure they do so. Another difference is that the UK tax year runs from April 6th to April 5th, whereas the US tax year follows the calendar year from January 1^st to December 31^st.

 

2. Investments

The most popular UK-based investments, such as exchange traded funds (ETF’s) and mutual funds, are likely to be treated as Passive Foreign Investment Companies (PFICs) by the US tax authority – the Internal Revenue Service (IRS).  In the UK, it is very common to see ETFs and mutual funds held inside an Individual Savings Account (ISA) because an ISA is tax-free in the UK.  In the US, however, the IRS does not recognize the tax-free status of an ISA and, as such, ETFs and mutual funds are taxed very inefficiently in the US and are complex investments to file on a US tax return.

For those who move back to the UK, a similar concept applies to US-based ETF’s and mutual funds. Unless they hold UK-reporting status or are held in an appropriate account, the gains will be subject to UK income tax when you return, rather than the more favorable capital gains tax rates. To avoid potential issues down the line, it is important to understand how an investment is taxed in both the US and UK, and make appropriate changes based on your current and future residence.

 

3. Maintaining Property in the UK

For many people, the move to the US will not be permanent, either by their own choice or because their visa will not allow it. It is therefore common for people to maintain a property in the UK and rent it out. If you receive rental income from your UK property, this will be assessed for UK tax. This income also needs to be declared on your US tax return, and the double taxation treaty should allow you to use foreign tax credits to mitigate the risk of paying tax twice. If you sell your UK property whilst a resident in the US, then it is likely that you will be required to submit a non-resident Capital Gains Tax return to HMRC within 60 days of selling the property.

 

4. Reporting Foreign Assets

Having a bank account in both the UK and the US is useful for those who travel between the two, but try to keep things simple by consolidating. If the aggregate values of your non-US bank accounts exceed $10,000 at any point in the year, you will need to file each account via the Foreign Bank Account Report (FBAR), and because this is an IRS requirement, there are significant penalties for failing to file.

There is an additional US annual reporting requirement for all foreign financial assets where the total value of these assets exceeds $50,000 at the end of the year, or $75,000 at any time during the year for individuals. These are the thresholds for US residents, which double for married couples.

 

5. Be Smart on Currency

Transferring money straight from your UK bank to your US bank is often the easiest option, but almost never the best option. Utilizing a reputable currency broker or online currency company may be cheaper. Traditional banks often lack transparency, advertising zero fees or commissions, yet failing to make it clear how much they are making on the conversion rate itself.

 

6. What to do with pensions and retirement plans

It is easy to forget about retirement accounts, but second to a person’s home, retirement accounts are often the next largest asset that a person owns. It is important not to neglect accounts left behind in the UK, and it’s equally important to be aware of the options available in the US. Understanding how these accounts will be treated if you leave the US will help provide a better outcome in the future.

 

7. Rebuilding your credit score from scratch

Unless you have a poor credit score in the UK and are happy to be leaving it behind, starting fresh can be irritating. Not only can this work against you when a landlord reviews your application, but it can take years to build your score back to an equivalent level. The knock-on effect could still be felt several years later when applying for a mortgage. The most common complaint is the chicken and egg situation – you apply for a credit card to start building a credit score, but the credit card company rejects the application because you have no credit score. There are some banking and credit institutions that operate in both the UK and the US who will use your UK credit history when reviewing your US application, so that may be a good place to start. You can find out more information about how the US credit score system works at www.usa.gov/credit-reports.

 

8. Wills and Trusts

If you have a will or power of attorney in the UK, check whether they will still carry out your wishes as intended, and whether they need updating. It will sometimes be necessary to have a will in both the UK and the US. The same is true for trusts, and in some cases, a trust in one country will be treated very differently in the other. For example, a UK trust can be brought into the US tax system if a trustee or beneficiary becomes a US taxpayer. Similarly, a simple living trust in the US can become a UK resident trust if you return to the UK. Advice is key in this area before making any decisions about restructuring or making changes.

 

9. Estate Planning

Estate taxes and inheritance taxes are different in both countries, and in the US, you have the additional complication of different state rules. At the federal level, the 2023 estate allowance is $12.92 million. A married couple who are both US citizens and long-term residents can protect $25.84 million from federal estate taxes. The unlimited marital deduction also enables any amount to be passed to a spouse free from federal estate taxes. In situations where one of the spouses is still deemed to be UK domiciled, which is not the same as being UK resident, the rules can be much less generous.

The estate allowance in the UK is far lower than in the US. In 2023, the allowance is £325,000 per person, with the potential to increase to £500,000 where a primary residence is passed onto children and grandchildren, as well as your estate being worth less than £2 million. Understanding domicile is key to understanding UK/US estate planning because it impacts not just which assets are liable to estate tax, but also whether you are liable for any estate tax at all.

 

10. Seek advice if you are unsure

When moving countries there are many considerations over and above finding a place to live and adapting to a new environment. In some instances you may be able to find the answers yourself, but if you are unsure, work with professionals who have experience working with cross-border families. Living, earning, and investing in different countries may add a layer of complexity, but effective planning often presents financial opportunities.

 

Cross Border Financial Planning USA LLC is an investment adviser located and registered in Pennsylvania. 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 State of Pennsylvania. Cross Border Financial Planning USA LLC only transacts business in states in which it is properly registered 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.

Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any mention of a particular security or type of security is not a recommendation to buy or sell that security. Investing involves risks including the possible loss of capital. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Cross Border Financial Planning USA are not tax or legal advisors, and you should discuss any tax or legal matters with the appropriate tax or legal professional.