Real estate alternatives

[mtbc]

It is worth noting that, as a US citizen domiciled in the UK, unless I want to buy gold ingots, my investment options other than buying a house are rather limited if I want low tax rates and easy tax filings. Thanks to FATCA¹ reporting which goes even beyond the requirements of FinCEN² many banks and brokerages will not touch me at all. The taxation consequences of the usual British approach of putting UK-based mutual funds into an ISA³ would probably be horrifying from an American point of view. So, if I have a lot of cash but fear exposure to our local property market through Brexit and wish to avoid the high conveyancing costs of a house purchase and subsequent sale then what are my options?

The simplest sane example that is worth proposing as an alternative course of action is instead to sink the capital into an account with Interactive Brokers and buy Vanguard's exchange-traded funds, e.g., Total World Stock and Total Bond Market split according to my appetite for risk. These funds are not regarded by the IRS⁴ as PFICs⁵ so they are not heavily taxed by the US and they are also approved by HMRC⁶ as offshore funds that report to UK accounting standards so they are also not heavily taxed by the UK: indeed, I can probably return to the US then sell them and consider only US capital gains tax.

Those illustrative Vanguard funds seem to me to be more cautiously likely to grow in value satisfactorily, the transaction costs are low and the investment is clearly agreeably liquid: from past performance and with dividend reinvestment then after I finally return to the US and sell my share of the funds I may plausibly end up with a gain of around a third even after tax, far more than I expect the local property market to grow. I wonder how much this reassurance costs me given that over the next few years my monthly housing payments would then be going into somebody else's equity instead of my own. As it saves me from having to also cover maintenance and insurance of the house, etc., my back-of-the-envelope calculations suggest that the flexibility of continuing to rent may cost me little indeed: which alternative wins out depends on exactly what the various costs turn out to be.

(There are already enough acronyms in the above that I chose to avoid ETF, CGT, etc. too.)

¹Foreign Account Tax Compliance Act
²Financial Crimes Enforcement Network
³Individual Savings Account
⁴Internal Revenue Service
⁵Passive Foreign Investment Companies
⁶Her Majesty's Revenue and Customs

Comments

[aldabra]

Have you looked at premium bonds? The capital is guaranteed and the pay-outs are tax-free, at least under UK law, because they count as winnings rather than interest. The effective interest rate is low, but I reckon it's worth it for the reduction in headspace due to not having to keep track of interest. If you have a five-figure investment you get letters most months saying you've won trivial but positive amounts, which is intrinsically cheering.

If you've got house-sale-scale proceeds that you're dithering about finding a home for, you want to at least split them between banking groups while you dither so that you're not above the bank deposit guarantee in any group.

[mtbc]

Martin Lewis was a bit down on premium bonds in The Telegraph a while ago but interesting point about different banking groups. I think the bond winnings look like regular income on my US taxes but then probably so does interest on cash ISAs and we get a $12,700 (in 2017) standard deduction.