For Americans living in the UK who want to start investing money, there are several challenges to deal with because of their unique situation. Figuring out the financial scene, understanding taxes, and dealing with higher trading costs on smaller investment amounts can be quite a puzzle that needs careful attention and planning.
1. Limited Options in the UK
One big problem for Americans in the UK is that most financial companies don’t want to work with them. This is mainly because of different rules and extra paperwork required by the US, making it hard for them to find good investment choices.
2. Tax Complications with PFICs
A major issue comes from the common use of Passive Foreign Investment Companies (PFICs) in the UK. While these are fine for those who are not US-connected, they create a lot of tax problems for Americans.
The main trouble is the strict tax rules from the US Internal Revenue Service (IRS). Investing in PFICs means dealing with complicated tax reports, which can lead to higher taxes and more paperwork for Americans. This makes these investments less attractive for many because of the tax complications and extra rules.
3. Smaller investment amounts
Investment companies that follow US rules in the UK often ask for a lot of money to start with. It could be anywhere from £500,000 to £1 million or even more. These high minimums stop many Americans from investing smaller amounts of money.
These larger starting amounts mean a lot of Americans can’t access professional investment services, diverse portfolios, and chances for growth. This makes it even harder for them to find good investment options that follow both US rules and fit their budgets.
4. Investment diversification challenges: The Microsoft Example
Even if you find investment solutions that follow US rules and don’t ask for huge starting amounts, there are still challenges. Imagine you want to invest $10,000 across different stocks, and you want 2% of your portfolio in Microsoft, which at the time of writing this article costs $374 per share.
The problem comes when $200 (2% of $10,000) is not enough to buy even one share of Microsoft because of its price. This means your investments might not be spread out properly across different stocks that may make a good diverse portfolio.
5. Impact of Trading Charges
On investment platforms that allow US-connected clients to invest, a typical portfolio might have 30 to 35 different stocks. Every time you trade, whether it’s buying, selling, or adjusting, you pay a fee, which can be around $10. Even if you trade less often, these fees add up, contributing an extra 1 to 1.5% in yearly costs for portfolios under £250,000 and eating into your growth and making investment decisions and managing your portfolio more complicated.
6. The Next Steps
In summary, investing for Americans in the UK needs a careful approach. You have to think about tax laws, investment options, starting amounts, and trading costs. Even though there are challenges, making smart choices and getting professional advice can help you navigate this complicated situation, opening up opportunities for potentially successful and lasting investments.
At Cross Border Financial Planning, we specialise in advising US connected clients in the UK and US. We can help you understand what your investment options are and provide everything you need to create an appropriate investment strategy and manage it for you going forward.
Investments can rise and fall and you may get back less than what you started with. This article is for guidance only and does not constitute individual financial advice. The Financial Conduct Authority does not regulate tax planning. Cross Border Financial Planning are not tax advisers and we do not offer tax advice.
Author: Philip Teague
Role: Executive Director @ Cross Border Financial Planning
Contact Author: Here
