Identifying whether a fund offered by UK organizations is US/UK Tax Treaty recognized

Justice68

Hello, good day

US/UK citizenship, UK resident, no US assets, holdings or business/employment dealings

Seeking to understand how one might identify whether a fund is recognized by the US/UK tax treaty and what in fact "recognized" means in this case e.g. is that the same as saying it's HMRC domiciled or something else?


The aim is to invest in a sAVC 
I have been through the guidance here
[  mandg.com/pru/customer/en-gb/existing-customers/contact-us/call-us#accordion-197900faed-item-24c062a385 }  that introduces and teaches about the SAVC offering

The individual funds it cites (example  fundslibrary.co.uk/FundsLibrary.BrandedTools/PruConsumer/DataOnline/HtmlFactsheet/7162945b-15ac-4bd9-ae3e-4463fa9a34c0?#essentials)  have fact sheets.
Anyone with a better eye possibly sees whether that information is included there-in the sheets?

I have tried asking Prudential/MANdg and they are not helpful

I am in interest of this information as it is my understanding that in event the fund(S) are not recognized under the US/UK tax treaty that issues will arise if nothing else by tripping PFIC and bringing IRS' vision to the parapet.

Thank you

EdSwippet

Justice68 said:

Seeking to understand how one might identify whether a fund is recognized by the US/UK tax treaty and what in fact "recognized" means in this case e.g. is that the same as saying it's HMRC domiciled or something else? ...

Welcome to the forum. Your post has a few confusing details in it. I'll try and unpick some, but other parts remain unclear, at least to me.

Firstly, a fund cannot be "HMRC domiciled". Its domicile is the country in which it's registered. In the case of the fund you asked about (Prudential Dynamic Growth V S3, GB00BSPBVC27), the GB part indicates that it's "UK domiciled". This would make it a PFIC under US taxes, so a truly horrible thing to hold in an account that isn't protected from US tax by treaty.

Now, pensions in general are protected from US tax by treaty; in fact, they are the only UK account type that have any treaty protection (so beware ISAs, for example). There are some fiddly rules - for example, you're limited to annual contributions equivalent to that allowed to US retirement plans, and this is smaller than the UK's current £60k - and annual US tax "informational" reporting is a grey area, raising at least the spectre of forms 3520 and 3520A. But broadly, holding this in a UK employer pension or a SIPP should be okay for your US tax. It doesn't matter that the fund would be a US PFIC, since the treaty protects everything held inside the UK pension wrapper.

I'm not sure what you meant by "SAVC". I couldn't find it on the web site you referenced - but it sounds pension-like. Are you planning to hold this fund in some form of a pension, or something else?

Anyway, that's your own treaty position in a nutshell. Beyond this though lies another question, which is how does this UK domiciled fund's own treaty position work?

Again in general, UK domiciled funds can use the treaty to gain a 15% rate on dividends from US stocks. And there is a special clause in the treaty that specifically allows UK pensions a 0% rate on US dividends. It's not clear whether or not this particular fund could use that treaty clause; digging through the annual reports might reveal that. Either way though, it should be as good tax-wise as - or at least no worse than - comparable funds.

Finally, a recommendation for a web page that might clear up some of this for you:

Investing from the UK for US citizens and US permanent residents

A little light reading there, then. Those of us not burdened with US citizenship can only marvel at the myriad ways the US manages to find to frustrate the finances of its nonresident citizens.

QrizB

EdSwippet said:

I'm not sure what you meant by "SAVC". I couldn't find it on the web site you referenced - but it sounds pension-like.

I read it as a freestanding AVC? But that's mostly a guess.

Justice68

QrizB said:

EdSwippet said:

I'm not sure what you meant by "SAVC". I couldn't find it on the web site you referenced - but it sounds pension-like.

I read it as a freestanding AVC? But that's mostly a guess.

@Ed, thank you for the reply and the information share
My summary take away from your comments are that:

- The fund example (and likely others) are UK domiciled 
--Technically even in the Pension arrangement, they are PFIC 
---However due to the tax treaty, then they (and their interested gained), is protected 

-- In event they were instead used as part of a GIA or Stocks and Shares ISA etc. then they would not be protected

That leads me to ask then whether or not the IRS expects to see /know about the pension and or it's contributions now, or they want to know about it later at drawdown

And whether it being used by government employees changes anything of note

=-=

To your question and QrizB, the sAVC is Shared Additional Voluntary Contribution 
The initial; blurb from Moneymatters  [my-money-matters.co. uk/avcs]  reads as follows:
"

A core component of what we do at My Money Matters is salary sacrifice Shared Cost Additional Voluntary Contributions (Shared Cost AVCs), a lesser-known benefit available to employees within the Local Government Pension Scheme (LGPS) that helps them save more for retirement.

 

Many employees assume their state pension will be enough to provide a substantial income for retirement, but that’s rarely the case.

What are Shared Cost AVCs? 

Shared Cost AVCs enable the employee to build an additional pot of money alongside their pension with contributions exempt from Income Tax and National Insurance contributions (NICs), with the potential to take it all as a tax-free lump sum when they retire.  

​

The AVCs are held with the AVC provider (Standard Life, Prudential etc.) and are processed via a reduction in the employees salary via a salary sacrifice arrangement, on which the employer also makes savings by paying less employer NI. "

Bostonerimus1

The safest way to proceed is to consider anything other than bank accounts and individual stocks and bonds to be PFICs so you'll face a heavy reporting requirements and potentially a big US tax bill if you own them outside a pension tax wrapper. If the AVCs can be show to be part of a UK pension arrangement then the US/UK tax treaty recognization of the UK pension tax wrapper will protect the UK funds from PFIC tax treatment and you'll just pay income tax when you tax distributions. If you want to invest in "mutual funds" or EFTs as a US citizen resident in the UK in a GIA then you can invest in US domicile EFTs that are HMRC reporting in a general account in the USA; many Vanguard ETFs are HMRC reporting. Also Schawb is trying to get the UK to allow it to sell some of its US ETFs in the UK and that would be very convenient for US citizens living in the UK.

EdSwippet

Bostonerimus1 said:

If you want to invest in "mutual funds" or EFTs as a US citizen resident in the UK in a GIA then you can invest in US domicile EFTs that are HMRC reporting in a general account in the USA; many Vanguard ETFs are HMRC reporting.

In theory. However, finding a way to actually buy US domiciled ETFs is the trick, and this is not easy.

The nonsensical PRIIPs (MiFID 2) rules mean that brokers and platforms may not offer any ETF without an appropriate KIID (Key Investor Information Document) to UK and EU residents, and so far no US domiciled ETF or fund issues such a document. My understanding, which may be faulty, is that US fund rules actually prevent a US domiciled fund from revealing some of the information required by the KIID regulation.

There is a long-running UK consultation over reforming the UK's version of PRIIPs; a minor Brexit benefit, if it ever happens. However, so far no action apart from consultation. There does seem to be at least a mild intention to allow US domiciled funds and ETFs in the UK again though. Just best not to hold your breath.

Also Schawb is trying to get the UK to allow it to sell some of its US ETFs in the UK and that would be very convenient for US citizens living in the UK.

Do you have any specific update? I've heard this, not only on the general grapevine but around a year ago from Schwab themselves. However, it's been unclear so far as to whether they are actively investigating making their own ETFs PRIIPs compliant or if they're simply monitoring the UK PRIIPs reform consultation closely.

I'm personally watching this area closely. Thanks to xenophobic, lazy, and bureaucratic policies and actions on the part of Vanguard US, my own Vanguard IRA may soon be forced to take refuge in Schwab.

Justice68

Bostonerimus1 said:

The safest way to proceed is to consider anything other than bank accounts and individual stocks and bonds to be PFICs so you'll face a heavy reporting requirements and potentially a big US tax bill if you own them outside a pension tax wrapper. If the AVCs can be show to be part of a UK pension arrangement then the US/UK tax treaty recognization of the UK pension tax wrapper will protect the UK funds from PFIC tax treatment and you'll just pay income tax when you tax distributions. If you want to invest in "mutual funds" or EFTs as a US citizen resident in the UK in a GIA then you can invest in US domicile EFTs that are HMRC reporting in a general account in the USA; many Vanguard ETFs are HMRC reporting. Also Schawb is trying to get the UK to allow it to sell some of its US ETFs in the UK and that would be very convenient for US citizens living in the UK.

@Bostonerimus1
Your line there 
" If the AVCs can be show to be part of a UK pension arrangement then the US/UK tax treaty recognization of the UK pension tax wrapper will protect the UK funds from PFIC tax treatment and you'll just pay income tax when you tax distributions."

Is in effect what I am trying to drill down to -hence my query about whether they are recognized
I read from your language that as long as the funds are in-effect a part of a 'pension' (presumably common definition here is suitable, nothing extraordinary), then all is well to proceed.

Prudential's own website speaks about the AVCs and SAVCs, and they are falling under the umbrella of "pension," and everywhere Money Matters mentions SAVCs the word "pension" is often in the same breath.

I am not sure how much more I could confirm whether it's safe to go that route

=-=
Concerning the Mutual fund/EFT and investments, I note you specified in a US account, not a UK one
This is an avenue indeed, presuming that the US side allows you (or in event you register with a US address, that they don't catch you later..)

I see you mentioned Schwab, didn't they try that about half decade ago then gave up these past few years due to biting off more than they could chew.


I appreciate this US/UK discussion has been done to death on these forums and elsewhere though might I sneak in two clarifying questions

1. You mentioned that anything other than bank accounts, bonds, individual stocks etc. is unlikely safe to proceed
What about 'bank accounts' is then safe? I take it you don't mean safe from the IRS( i.e. cash ISA interest may still be taxed [assuming you report it...]), however you won't get done harshly because they're not seen as PFIC
?

2. A quick comment on mortgages opened by US on UK soil..is there any thing or any key terms/policies particularly worth searching for when studying this subject from the UK side, where it concerns US citizens

@e@EdSwippet
Thanks again
Yes your comments about KIID are understandable. The summary result is that these days the average earning US/UK persons probably won't have much luck with even the simple 'Dave Ramsey throw some money in a tracking fund, set and forget it.'

I do look forward to the possible future where these things obtain some revision

Hopefully your IRA issues will never come to pass. And equally I hope this pension investment I am pursuing, won't back fire in twenty years with Prudential turning around and saying that they're no longer offering services to US citizens, forcing me to somehow transfer the pension elsewhere (which is going to be a challenge since it's only local government scheme sponsored e.g. you can't really take it anywhere else..)

Bostonerimus1

EdSwippet said:

Bostonerimus1 said:

If you want to invest in "mutual funds" or EFTs as a US citizen resident in the UK in a GIA then you can invest in US domicile EFTs that are HMRC reporting in a general account in the USA; many Vanguard ETFs are HMRC reporting.

In theory. However, finding a way to actually buy US domiciled ETFs is the trick, and this is not easy.

The nonsensical PRIIPs (MiFID 2) rules mean that brokers and platforms may not offer any ETF without an appropriate KIID (Key Investor Information Document) to UK and EU residents, and so far no US domiciled ETF or fund issues such a document. My understanding, which may be faulty, is that US fund rules actually prevent a US domiciled fund from revealing some of the information required by the KIID regulation.

There is a long-running UK consultation over reforming the UK's version of PRIIPs; a minor Brexit benefit, if it ever happens. However, so far no action apart from consultation. There does seem to be at least a mild intention to allow US domiciled funds and ETFs in the UK again though. Just best not to hold your breath.

Also Schawb is trying to get the UK to allow it to sell some of its US ETFs in the UK and that would be very convenient for US citizens living in the UK.

Do you have any specific update? I've heard this, not only on the general grapevine but around a year ago from Schwab themselves. However, it's been unclear so far as to whether they are actively investigating making their own ETFs PRIIPs compliant or if they're simply monitoring the UK PRIIPs reform consultation closely.

I'm personally watching this area closely. Thanks to xenophobic, lazy, and bureaucratic policies and actions on the part of Vanguard US, my own Vanguard IRA may soon be forced to take refuge in Schwab.

To hold and trade on a US based GIA you would have had to open one when you were a US resident and you need a US postal address. I know of several US/UK dual citizens who live in the UK and use a US relative's address or just pay for an address from one of the many mail services available. They have been able to buy and sell Vanguard ETFs without any issues, although Vanguard's exact policy is always a moving target hidden in shadow. Such a set up has also allowed one of them to do IRA to ROTH rollovers and only pay US tax by claiming exemption from UK tax under the "lump sum" treaty provision.

As far as Schwab goes I've only read a couple of press releases and trade articles that were published in 2024. But in response I have opened a US Schwab account just in case it becomes the easiest solution.

Bostonerimus1

Justice68 said:

Bostonerimus1 said:

The safest way to proceed is to consider anything other than bank accounts and individual stocks and bonds to be PFICs so you'll face a heavy reporting requirements and potentially a big US tax bill if you own them outside a pension tax wrapper. If the AVCs can be show to be part of a UK pension arrangement then the US/UK tax treaty recognization of the UK pension tax wrapper will protect the UK funds from PFIC tax treatment and you'll just pay income tax when you tax distributions. If you want to invest in "mutual funds" or EFTs as a US citizen resident in the UK in a GIA then you can invest in US domicile EFTs that are HMRC reporting in a general account in the USA; many Vanguard ETFs are HMRC reporting. Also Schawb is trying to get the UK to allow it to sell some of its US ETFs in the UK and that would be very convenient for US citizens living in the UK.

@Bostonerimus1
Your line there 
" If the AVCs can be show to be part of a UK pension arrangement then the US/UK tax treaty recognization of the UK pension tax wrapper will protect the UK funds from PFIC tax treatment and you'll just pay income tax when you tax distributions."

Is in effect what I am trying to drill down to -hence my query about whether they are recognized
I read from your language that as long as the funds are in-effect a part of a 'pension' (presumably common definition here is suitable, nothing extraordinary), then all is well to proceed.

Prudential's own website speaks about the AVCs and SAVCs, and they are falling under the umbrella of "pension," and everywhere Money Matters mentions SAVCs the word "pension" is often in the same breath.

I am not sure how much more I could confirm whether it's safe to go that route

=-=
Concerning the Mutual fund/EFT and investments, I note you specified in a US account, not a UK one
This is an avenue indeed, presuming that the US side allows you (or in event you register with a US address, that they don't catch you later..)

I see you mentioned Schwab, didn't they try that about half decade ago then gave up these past few years due to biting off more than they could chew.


I appreciate this US/UK discussion has been done to death on these forums and elsewhere though might I sneak in two clarifying questions

1. You mentioned that anything other than bank accounts, bonds, individual stocks etc. is unlikely safe to proceed
What about 'bank accounts' is then safe? I take it you don't mean safe from the IRS( i.e. cash ISA interest may still be taxed [assuming you report it...]), however you won't get done harshly because they're not seen as PFIC
?

2. A quick comment on mortgages opened by US on UK soil..is there any thing or any key terms/policies particularly worth searching for when studying this subject from the UK side, where it concerns US citizens

@e@EdSwippet
Thanks again
Yes your comments about KIID are understandable. The summary result is that these days the average earning US/UK persons probably won't have much luck with even the simple 'Dave Ramsey throw some money in a tracking fund, set and forget it.'

I do look forward to the possible future where these things obtain some revision

Hopefully your IRA issues will never come to pass. And equally I hope this pension investment I am pursuing, won't back fire in twenty years with Prudential turning around and saying that they're no longer offering services to US citizens, forcing me to somehow transfer the pension elsewhere (which is going to be a challenge since it's only local government scheme sponsored e.g. you can't really take it anywhere else..)

If these AVCs are buying investments inside a UK workplace pension then any funds you buy will be inside a pension tax wrapper recognized in the treaty so there should be no PFIC worries.

When I say bank accounts, individual shares and bonds are "safe" I just mean that they will get regular treatment by the IRS for tax of interest, dividends and capital gains. Of course you'll still gave to watch out for FATCA etc with these non-US assets. ISAs are not recognized by the IRS so they are not of much use to US citizens and any funds inside would be open to PFIC tax.

Justice68

I was under the knowledge the cash ISA's interest gained, is taxable by IRS e.g. they do not respect the wrapper, however that unlike stocks ISA's, cash ISA interest is not seen as PFIC (and thus does not incur the additional tax [and paperwork])?

If that's not the case then I better move all my cash ISA to an English family member promptly

Bostonerimus1

Justice68 said:

I was under the knowledge the cash ISA's interest gained, is taxable by IRS e.g. they do not respect the wrapper, however that unlike stocks ISA's, cash ISA interest is not seen as PFIC (and thus does not incur the additional tax [and paperwork])?

If that's not the case then I better move all my cash ISA to an English family member promptly

You need to be careful about structures here. The IRS doesn't recognize an ISA so it looks right through it and will tax anything inside. An S&S ISA will be bad news for US tax payers if they hold a UK mutual funds inside as they are PFICs. You might squeeze out some advantage by holding individual stocks as these will avoid UK tax and just be taxed regularly by the IRS. For cash ISAs if they are just saving accounts then there will be no PFIC issues. But things like money market funds will be PFIC.