UK resident : Vanguard USA dropped a bombshell

BlisteringBarnacles

cross posting here for visibility and any other opinions. If you have an account in bogleheads please respond there.

Short summary : have non reporting funds in Vanguard USA from the old days. They are pretty much kicking me out now since I am non resident alien. Being forced to sell means $160,000 capital gains tax (actually income tax).

https://www.bogleheads.org/forum/viewtopic.php?t=441595

Thanks

wmb194

BlisteringBarnacles said:

cross posting here for visibility and any other opinions. If you have an account in bogleheads please respond there.

Short summary : have non reporting funds in Vanguard USA from the old days. They are pretty much kicking me out now since I am non resident alien. Being forced to sell means $160,000 capital gains tax (actually income tax).

https://www.bogleheads.org/forum/viewtopic.php?t=441595

Thanks

I'd try transferring them to Interactive Brokers.

GeoffTF

Vanguard wrote:

"If your account remains open on our legacy investment platform by the end of 2025, it will be restricted to prevent any transactions other than withdrawals or transfers of assets to another firm."

I have a friend who is resident in the UK with UK and US citizenship and an account with Fidelity in the US. He can sell but he cannot add to his holdings or buy new ones. Perhaps that is what Vanguard is proposing.

BlisteringBarnacles

Thanks wmb194. I hold US domiciled mutual funds, dont know if Interactive Brokers will allow US mutual funds for UK residents. I know Fidelity doesnt, and If they convert it into ETF that would be a sale which means taxes.

Vanguard US said on the phone today that they have a way of converting mutual funds to ETF that does not trigger a sale. (but obviously not applicable to me since I am non resident). But this is not chemistry. I dont know how they can do this conversion without triggering a sale (and hence taxes).

Thanks

wmb194

BlisteringBarnacles said:

Thanks wmb194. I hold US domiciled mutual funds, dont know if Interactive Brokers will allow US mutual funds for UK residents. I know Fidelity doesnt, and If they convert it into ETF that would be a sale which means taxes.

Vanguard US said on the phone today that they have a way of converting mutual funds to ETF that does not trigger a sale. (but obviously not applicable to me since I am non resident). But this is not chemistry. I dont know how they can do this conversion without triggering a sale (and hence taxes).

Thanks

Obviously you need to ask IB but if any broker can do it that would be my guess.

Bostonerimus1

This is Vanguard's standard policy for everyone without a US mailing address. You are not allowed to trade on your accounts other than to automatically reinvest dividends and annual capital gains distributions, sell and transfer to another platform. The situation is identical for US citizens living outside the US who don't have the foresight to keep a US mailing address. This has been the policy for a while, but they have been lax in applying it. They do not require you to sell because you are non-resident. If they won't open a new brokerage account for you they should let you keep the accounts and then I would start selling regularly taking into consideration your tax situation and moving the cash to the UK. If you have ROTHs just sell those and move the cash to the UK. There will be no US or UK tax to pay, but Vanguard will probably withhold 30% as a CYA move and you'll have to claim it back from the IRS.

You also seem to have run up against their recent updates to their services where they stopped providing the accounts limited to Vanguard mutual funds and required all accounts to be moved to their full service brokerage operation. This didn't change anything in practice. If your funds are inside retirement accounts like IRAs their HMRC non-reporting status is irrelevant, but if they are in a general account you should have transferred them to the equivalent HMRC reporting ETF, if one exists, ideally just before you left the USA.

The one saving grace in this is that you are not a US citizen because at least you can sell and invest your money pretty easily elsewhere. If you were a US citizen you would have been in a Catch 22 situation of having no ability to invest in the US and having severe restrictions in the UK because of IRS tax rules and the difficulty of opening any UK investment accounts. So I would probably leave your funds where they are, but start selling with the goal of getting the balances to zero over a number of years.

BlisteringBarnacles

Thanks Bostonerimus1 and others. I was able to buy and sell inside the Roth IRA online with no issues at all even as recently as few months ago. Perhaps they were lax in applying the rules.

I have updated the bogleheads thread. I spoke to a representative later in the day and he seemed to think that I will be transitioned over to the brokerage account automatically. Sounds too good to be true. I will call couple more times and see if I get consistent info.

Looks like i will be barred from buying mutual funds but they will probably allow me to sell and buy ETFs which is not too bad I suppose.

I may be able to move my Roth IRA to Fidelity where I already have a Roth IRA. Fidelity does not allow me to buy mutual funds, only ETF allowed. So, for Roth I have a solution : Either Vanguard allows me to buy ETFs or I move to Fidelity.

My taxable is where I have the problem. I hold non HMRC distributing funds. Want to try my best to avoid selling and triggering income tax to the tune of my profit of $160,000. If Vanguard allows me to just keep the funds (and not force me to liquidate) thats not such a bad option. But if they force me to sell or force me to go to another provider who will not allow in-specie transfer then I could be in big trouble.

Anyway I dont need to decide now. I have until end of 2025. Given my haphazard portfolio with non distributing funds etc, I am probably better off going away to India or Australia for 5 years, liquidate all these suboptimal investments without any capital gains tax. India has a 1 year tax holiday and Australia will only tax the growth in investment value after I relocate there. I have permanent residency in India (something like a green card) and as regards Australia I might be able to get a job there, as an English manager from the old days who had high regard for my work relocated to Australia and never returned.

Thanks

Bostonerimus1

Holding the mutual funds outside of a retirement account will be very tax inefficient for UK tax. You should be paying tax on dividends and annual capital gains on those each year at your marginal UK income tax rate...I assume you also comply with any US tax obligations. Schwab are pretty good with stuff like this, but I don't think you'll be able to open an account as a non-resident. If Fidelity are more flexible you could do a Transfer of Assets in kind and there should be no US tax implications. Not sure how HMRC would look at that though.

EdSwippet

Bostonerimus1 said:

Holding the mutual funds outside of a retirement account will be very tax inefficient for UK tax. You should be paying tax on dividends and annual capital gains on those each year at your marginal UK income tax rate ...

Not exactly. You pay UK tax annually on dividends as normal, but the UK has no annual mark-to-market rule for unrealised gains in non-reporting funds; compare to the US's appalling PFIC tax rules.

Instead, you pay ordinary income tax rates on any realised capital gains. So you can defer this punitive taxation until sale. (Or even avoid it altogether by emigrating.)

Bostonerimus1

EdSwippet said:

Bostonerimus1 said:

Holding the mutual funds outside of a retirement account will be very tax inefficient for UK tax. You should be paying tax on dividends and annual capital gains on those each year at your marginal UK income tax rate ...

Not exactly. You pay UK tax annually on dividends as normal, but the UK has no annual mark-to-market rule for unrealised gains in non-reporting funds; compare to the US's appalling PFIC tax rules.

Instead, you pay ordinary income tax rates on any realised capital gains. So you can defer this punitive taxation until sale. (Or even avoid it altogether by emigrating.)

What about automatic capital gains distributions that US mutual funds are required to distribute each year. These are often immediately reinvested, but they appear on your 1099-B. Holding the ETF does not avoid taxation on these things, but at least you get to do it as dividends and capital gains and not income.

The bottomline on the OP's situation is that it's unfortunate that they left the US so long ago when planning for such eventualities didn't seem as necessary. But the OPs situation is something that US-non residents have been dealing with for years now and they can still sell at their convenience or do a TOA in kind to Fidelity if that helps. So there are sensible options that shouldn't be a tax disaster.

EdSwippet

Bostonerimus1 said:
What about automatic capital gains distributions that US mutual funds are required to distribute each year. These are often immediately reinvested, but they appear on your 1099-B. Holding the ETF does not avoid taxation on these things, but at least you get to do it as dividends and capital gains and not income.

Somewhat. However, most Vanguard index funds actually distribute no realised capital gains annually, some for years on end (example 2023 listing -- only a few funds shown from hundreds available, and the OP will hold none of those listed).

For a well-run US domiciled index fund in particular, a capital gains distribution tends to be the exception rather than the norm. In fact, this rarity of capital gains distributions is one of the attractions of index funds for US investors holding taxable accounts.