# US taxation of UK investment bond



## Mannisenmaki (Feb 2, 2013)

Hello everyone

I have recently inherited two UK investment bonds and am trying to establish the most tax efficient way to encash them. The best option I currently have is to transfer ownership of the bonds to my wife and for her to partially surrender the bonds over a number of years. Since she is in a lower income tax band than me, this will mean less tax is paid.

The issue is that she is a dual US/UK citizen. We live in the UK.

Is anyone familiar with the way that gains from such a bond would be taxed in the US? In case it helps, here is a link to a document setting out the UK tax treatment for these bonds - https://www.pru.co.uk/pdf/INVS0002.pdf. 

Many thanks in advance

Nick


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## 255 (Sep 8, 2018)

Mannisenmaki -- In reading your post, I assume you are a UK citizen only. Since you inherited the bonds, they are now yours (and it appears your basis would be the "fair-market-value," at the time of the decedents death, same as in the U.S.) If you "gifted" the bonds to your wife, her basis would be the same (at least for U.S. tax purposes.)

I've read your Prudential link and it appears it would depend on the specific make-up of the bonds, on how they are taxed. In the U.S., passive income is taxed very favorably, with dividends, interest and long-term capital gains taxed at 0% for lower income filers. Depending on the specific bond, she may have to pay taxes on dividends, interest and capital gains, but I suspect it will only be a paper work drill and no, or very little, taxes will be owed. If she had to pay taxes in the UK, she could use the foreign tax credit against any U.S. she is required to pay. Cheers, 255


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## Mannisenmaki (Feb 2, 2013)

Hello 255

Yes I am a UK citizen only.

Regarding the make-up of the bonds, that may be a bit difficult to determine as one can invest only in fund which then themselves invest in a variety of different investments. Certainly no detail is given in the annual statements. If a "chargeable event" were to occur, I do not think the gain would be broken down into dividends, interest, etc. but rather stated as a global figure. Also, I assume there may be an issue with the fund being a PFIC unless each investment within the fund is US domiciled and UK reporting?

Many thanks

Nick


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## 255 (Sep 8, 2018)

Mannisenmaki -- Yes, your concerns are warranted. I had taken at face value that this was simply a bond (debt obligation however, if this is actually some kind of collective investment vehicle, you should absolutely keep your wife out of the picture. Both the taxation and reporting by U.S. persons owning PFICs are draconian! PFICs are taxed at the highest income tax rate, currently 37% (soon to be 39%, if President Biden gets his way,) irrespective of the actual income of the owner. Cheers, 255

P.S. Sometimes, it's best to just "bite the bullet," pay the tax, and be done with it. My parents had a "weird" investment that their broker sold them. Unfortunately, it was illegal, in the U.S., to hold that type of investment in a tax sheltered account. I became aware when I was retitling all of my Dad's assets into my Mom's name (or the names of various trusts.) In our case, we just sold the investment, at a loss, and generally just "simplified" her portfolio.


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## Nononymous (Jul 12, 2011)

One must of course ask at this point whether your wife has any significant financial ties to the US, or plans to return. If not, US tax compliance is probably something she should consider avoiding in whole or in part, which would make the bond situation easier to deal with, though one should be aware of the possibility of their being reported under FATCA if transferred to an account in her name.


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## Mannisenmaki (Feb 2, 2013)

Thank you for the replies. I'll look into the precise investments in the bond and also ask the providers whether they meet the requirements for the fund not to qualify as a PFIC, but I doubt that will be the case. If so, it certainly sounds like I should keep my wife out of it.

She doesn't have significant ties to the US beyond a small amount of money in bank accounts in the US. No US source income. No plans to return to the US but she isn't prepared to give up her US citizenship. That being the case, I don't see any option but to comply with the US tax rules, whatever they are?

It may potentially be an option to assign to my children as well, but they are also dual US/UK citizens so I'm not sure this would really improve matters.


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## Nononymous (Jul 12, 2011)

Possibly not the place for this discussion, but having and keeping US citizenship does not, strictly speaking, require US tax compliance. Based on IRS data, the overall compliance rate for non-residents is probably around 10 percent. There's no check on tax status when renewing a passport or entering the country.

Not sure where your kids were born but if it's outside the US they can easily avoid all this by not disclosing their dual citizenship to banks and avoiding FATCA reporting. Absolutely no need for them to be filing US returns if they're not planning to move there in the near future.


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