SIPP and being an overseas resident

littly_kitty

I want to invest in shares for the long term (i.e. hold them for 30 years+). I am investing in shares that have consistently increased their dividend for the last 10 year. (I.e. I am not looking to sell them when the value goes up).

I thought a SIPP would be a perfect Tax Wrapper. (I can't touch the funds until I am 55, but that would be approx 30 years away).

However, it's my dream to move to America. Realistically I have a 40% chance of this happening in the next 3 years. I'd only be eligible for the E2 US visa which means I won't be a full US citizen.

If this happens, does this mean I won't be able to use the SIPP. After reading around, it seems you have to be a UK resident for a SIPP. However, it's not very clear on what they mean by "resident". Does it mean you actually have to live in the UK? (I'm guessing so..)

I know they make an exception if you have lived in the UK in the last 5 years, but I want to invest in my SIPP for 30+ years, so a 5 year exception isn't much help.

Thanks!

EdSwippet

As with anything involving the US and tax, a simple question never has a simple answer. I'll try to cover a few ground rules, though, which might get you started (or which might make you wish that you had never asked in the first place!).

You should be able to open a SIPP and contribute to it for the next three years or however long it is before you move to the US. After that things become complex. It is not likely you would be able to continue contributing to the SIPP, but once resident in the US you can of course use their equivalents -- IRA, 401k, 457b and so on. The annual pre-tax contribution limits on US plans are generally lower than allowed in the UK, around $16k or so.

After you move your SIPP will be an annual US tax reporting headache that you won't be able to rid yourself of because the UK won't let you close it out until you are 55, 60, or whatever the access age is by then. There are at least two US forms, FinCEN 114 and 8938 on which you would have to report the balance each year, perhaps along with an 8833 treaty claim. This is the best case. The worst is that the IRS views your SIPP as an 'offshore trust', bringing you the delights of form 3520, 3520a, a plethora of other reporting issues, and the pain of potentially having to pay US tax annually on gains and dividends paid within your SIPP, even though you have no way to actually access them. The US/UK tax treaty appears (in theory) to protect SIPPs, but professionals disagree so you will need good tolerance for ambiguity.

On top of all this you have to consider state taxes. States in general do not recognize US/UK tax treaties, so even if your SIPP returns are not taxable annually at the federal level, they could well be at the state level (California, for example), again leaving you to find money to pay the tax from elsewhere because you cannot draw it from your SIPP.

So far I don't know of any SIPP provider forcibly closing SIPPs for folks who move to the US, but some (eg AJ Bell) claim that they will forcibly close ISAs and trading accounts of anyone who moves to the US (but not any other country), thanks to overbearing US regulation. SIPPs could be next, although it would be harder to forcibly close these. Most likely you would instead be pushed into an expensive ghetto reserved for anyone with US taxpayer status.

Finally, if you take money from your SIPP while in the US the question arises of whether the 25% UK tax free lump sum is also US tax free. Again, professionals disagree, the relevant part of the US/UK tax treaty is murky and unclear, and states may not recognize the treaty anyway. Although uncertain, at least be prepared to lose the benefit of the 25% lump sum if you remain in the US until retirement age.

Sorry this isn't more encouraging. Unfortunately, this is the reality of international financial planning for anything involving the US. Now do you wish you hadn't asked? :-)

littly_kitty

EdSwippet, Thanks for such a detailed and awesome response.

I think the best strategy is if I buy the shares without a SIPP. If I haven't moved to the US within 3 years, then I probably never will, so I can just transfer the shares to a SIPP. It means I miss out on 3 years of tax relief, but it's less of a headache.

At least an ISA is more straightforward, as if I do move, I can just take the money out of the ISA (losing the tax shelter in the process, but at least I can spend the money).

Thanks again for your post!

EdSwippet

littly_kitty wrote: »

... awesome...

I see you've already adopted the lingo to help you fit right in :-)

littly_kitty wrote: »

I think the best strategy is if I buy the shares without a SIPP.... At least an ISA is more straightforward, as if I do move, I can just take the money out of the ISA ...

It's a hard call to make, especially if you lose out on tax relief. Remember, though, that you can carry forwards three years of allowance in the UK, so if you don't move you might be able to make back some of the lost ground.

A SIPP may be protected, at least partially, by the tax treaty, but if you run into US tax problems with it you cannot undo it and are stuck with the consequences for life. There is, I suppose, a very slim chance that the US will start taking a sensible approach to immigrants who still hold pensions back in the 'old country', but I'd say the chance is minuscule given the current direction of travel of US tax laws related to non-US affairs. More likely is a 'tightening' of regulations, and even greater balkanization of the US financial system. The US does not permit any QROPS-like transfers regime. A pension can never be transferred intact either into or out of the US.

An ISA is not covered by the tax treaty, meaning that it is definitely a US tax problem, but you can easily undo it. You can also more easily live with the consequences of not undoing it -- provided it holds only vanilla things (direct stock rather than funds or ETFs, for weird and inexplicable, though very painful, US tax reasons) the US tax treatment would be no worse than an ordinary trading account for the time you are US tax resident, and of course you can withdraw cash from it to pay the US tax. If/when you leave the US and return to the UK it goes back to being tax-sheltered. The bugbear will be finding a UK ISA provider willing to let you keep your ISA after you move to the US. As mentioned earlier, many, perhaps most, will not.

Annoying, though, isn't it?

littly_kitty

Thanks again EdSwippet.

I think I was initially confused because I read about QROPS and people using them to move to another country and enjoy their pension tax free (or for a lower tax rate depending on what the other country charges). But like you said, this doesn't apply to the US.

Thanks also for the ISA advice: I only have cash in mine, so it shouldn't be too much of hassle to take the money out (with the cost of losing the tax protection).

Thanks again!