For internationally mobile individuals, the UK possesses many features that are conducive to successful long-term investing: established capital markets, tax-advantaged wrappers, sophisticated wealth management, and broad access to global funds. However, for US-connected individuals living here - including US citizens, dual nationals, green card holders, and accidental Americans - investing can become extraordinarily complex. Products that are perfectly sensible for UK investors can create punitive US tax outcomes and investments that are tax-efficient in the US may result in reporting problems in the UK.
For these reasons, US-connected individuals are a particularly challenging client group for investment managers and advisers.
The central issue is that the US taxes individuals based on citizenship, while the UK taxes primarily based on residence. A US-connected person living in the UK may therefore remain subject to US tax reporting whilst fully participating in the UK tax system.
Many investments are treated differently by each jurisdiction. An investment strategy designed for UK efficiency can become problematic once viewed through a US tax lens.
No issue illustrates this more clearly than the Passive Foreign Investment Company (PFIC) regime. Under US tax rules, most UK mutual funds and ETFs are classified as PFICs, where gains can be taxed at the highest rates of income tax and subjected to interest charges that effectively backdate tax liability across the holding period. Additionally, each PFIC holding generally requires separate annual reporting, creating further compliance costs. A diversified portfolio containing dozens of non-US funds can quickly become an administrative burden.
For a US-connected individual living here, a standard UK fund can trigger highly punitive US tax treatment.
From a UK perspective, ISAs are attractive tax wrappers where income and gains are exempt from tax. However, the IRS does not recognise an ISA as a tax-exempt structure, and income and gains remain reportable. If the ISA contains non-US funds, the punitive PFIC rules apply inside the wrapper.
Wealth managers must navigate the operational challenges that come with managing money for US-connected clients living in the UK.
Tax differences – the different US and UK rules complicate portfolio management. The US taxes short-term gains more punitively than long-term ones - a distinction the UK doesn't make - so ordinary active management can trigger unexpected US tax. The two also calculate gains differently: the UK pools holdings on a weighted average cost basis, while the US uses specific lot identification or FIFO, so a single disposal can yield two different figures, requiring dual-basis recordkeeping. And since the UK computes gains in sterling and the US in dollars, currency movements alone can produce a gain in one jurisdiction and a loss in the other.
Reporting burdens - investment managers must also adhere to, and provide additional information for, reporting in both jurisdictions. Many firms simply decline to serve US-connected clients because the compliance burden is disproportionate relative to account size.
Despite these difficulties, effective solutions do exist. The key is that portfolios must be deliberately structured for cross-border compatibility rather than modified retrospectively.
One of the most popular solutions is the use of a fully segregated portfolio holding individual securities directly (equities, bonds, treasuries) rather than a UK-domiciled fund, which may qualify as a PFIC.
The advantages include flexibility in tax management and better coordination between US and UK reporting. They tend to have higher minimum asset levels and are therefore most practical for higher-net-worth investors.
The most significant practical problem is often the shortage of advisers equipped to handle both systems competently. A UK adviser may understand UK wrappers thoroughly but lack familiarity with PFIC rules or US reporting requirements.
The result is fragmented advice, particularly where tax advisers work separately from portfolio managers. Cross-border investing is a problem that must be tackled by a specialist tax adviser and investment manager working together seamlessly.
This is where McInroy & Wood aims to help. We are an SEC-authorised firm and have been managing fully segregated portfolios for US-connected clients for over 20 years. These are built from the outset for cross-border compatibility. We believe that for all of our clients, directly investing in quality companies is the best means to protect and grow their wealth.
Crucially, we do not seek to replace a client's tax adviser. We work alongside them, sharing the reporting detail they need in the format they need it. For our adviser partners, that means investment decisions that support their client’s tax strategy rather than undermine it. For our clients, it means a portfolio that finally works in both jurisdictions.
If you’d like to discuss our services in more detail, please get in touch with adam.linton@mcinroy-wood.co.uk
This is a financial promotion issued by McInroy & Wood Limited, which is regulated by the Financial Conduct Authority. The value of investments and the income they generate can fluctuate and may go down as well as up.
A particularly challenging client group for investment managers and advisers
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