S&S ISA Experiment – December 2021

Now that the London market has closed for the year, it’s time for another update on my S&S ISA experiment – no huge changes since September 2021, but good to look back on 2021 and see how it’s gone.

Very quick background – because of the PFIC limitations in holding index funds in an ISA, I’m trying a mostly “pseudo-indexing” approach in my and my wife’s ISAs, buying 40 individual stocks in the hopes of approximately matching the performance of the FTSE 100. They’re all UK listed stocks, avoiding foreign currency fees from Hargreaves Lansdown and any dividend withholding headaches from US stocks.

A couple small updates since September:

  • We’d already maxed out our ISA allowances for 2021-22, so no new contributions, just holding the same 40 stocks in our S&S ISAs and seeing how they do.
  • I changed the source of the monthly account fees (0.45%, capped at £45 a year, so £3.75 a month) from within our ISAs to newly opened taxable brokerage/general investment accounts (GIA, what HL calls a “Fund and Share Account”). This means that we keep £45 more a year within the ISA wrapper. For the moment, I just put £50 cash in the GIA, but am going to purchase £1,000 of two new stocks in each of them in January, in the hopes that the dividends will pay that £45 fee in perpetuity. This is a miniscule optimization, but there’s no downside so why not?

Performance Update

Honestly, aside from adding a few more months to the graphs below, there’s been very little change here since September. We’re still very close to the FTSE 100, so no complaints. Overall, if we’d put our money in a FTSE 100 ETF (CUKX), it would have grown 5.3% since we started our ISAs, which matches our actual performance (within £14, assuming equal fees).

Definitely more noise month to month, although by the end of December they’ve come together closely:

The performance of individual stocks is still all over the place, despite averaging out to something practically identical to the FTSE 100:

Is an ISA worth it?

The big question – after 9 months (a short trial in investing terms!), is an ISA worth it for a US citizen in the UK? Quick rundown of the pros and cons:

Advantages

  • UK tax-free dividends: you’ll never pay UK tax on dividends, while in a GIA, you’d pay tax on anything above the £2,000 annual allowance. You “only” need about a £50k ISA balance before this starts to matter.
  • UK tax-free capital gains: you’ll never pay UK tax on capital gains, while in a GIA, you’d pay tax on anything above the £12,300 annual allowance. In practice, the allowance is generous enough that this is pretty manageable, but it could be a significant benefit for very large balances.
  • Deeper awareness and understanding of investing: this is a double-edged sword, but I certainly feel like I’ve learned more about investing, the companies I’m invested in, and the broader British business world. It’s also fascinating, to me, to see the vastly disparate performance of individual companies, which averages out to something more modest in an index fund. You could see this without having any skin in the game, but that certainly helps drive interest.

Disadvantages

  • US taxable dividends and capital gains: compared to a GIA this is a wash, but clearly a disadvantage compared to a pension or IRA.
  • No indexing: this one is difficult to quantify, but there is clearly an increased risk of underperformance (or overperformance!) due to being invested in a smaller number of companies. Even just compared to the relatively small FTSE 100, that’s 2.5x more companies than the 40 in our ISAs. Compared to something like a total world ETF (Vanguard’s VT, for example), that’s 9,289 stocks compared to our 40 – not even close. So far, I feel reasonably comfortable that my performance isn’t going to dramatically diverge from the FTSE 100 in normal circumstances, but if the next Amazon/Apple/Tesla is a UK company that we haven’t bought in our ISA, there could be a much more significant divergence.
  • Skewed asset allocation: this is a constraint of how I have personally implemented my ISA, picking only UK stocks. This is for what I think is a good reason, avoiding currency conversion fees and dividend withholding headaches on US stocks, but it does mean that I’m overweight UK in my overall portfolio. I’m ok with a modest UK home bias, but not everyone will be. You could buy other country stocks too, but will have an even harder time mimicking a bigger index with only 20 stocks. You could buy more stocks, but the fees add up and each holding winds up tiny.
  • Higher fees: £45 a year for each account, plus £1.50 for regular investing, £11.95 for on-demand dealing, 1%/min £1 for dividend reinvestment – it all adds up. Managed carefully, I can keep it around £125 a year per account, but that’s a lot more than the 0.08% you might pay for an index fund for an account with a modest balance (£16 on a £20k balance at 0.08%). However, if your account value is north of about £150k, you might actually save money compared to an index fund. If you do any sort of active investing, the fees add up really fast – not recommended.
    • If you’re curious, that £125ish a year breaks down as:
      • £45 account fee
      • 19x £1.50 for regular investing (£1,000 for 19 stocks, once a year) = £28.50
      • 1x £11.95 for the 20th stock, using up the “leftover” cash from the other 19 (if you contribute £1,000 but the stock price is £19 a share, you get 52 shares and £12 change – add up all that change and you’ll want to buy something with it rather than sitting there at 0% interest)
      • 40x £1 dividend reinvestment fees (2 dividends per year, per stock) – this is technically a 1% fee, min £1 and capped at £10 per reinvestment, but none of my individual holdings are nearly big enough yet to throw off more than £100 per dividend = £40.
        • In practice it’s slightly less because a) not all the stocks pay dividends and b) if a single dividend doesn’t reach the £10 threshold for HL to reinvest, it just stays in cash until the next dividend, so only £1 to reinvest 2 dividends.
      • Total: £125.45
  • Bookkeeping: keeping track of the purchases of 40 stocks and their dividends is more work than just buying one index fund with a few dividends a year. It’s not unmanageable, and HL’s records are pretty easy to use plus an Excel sheet, but it is a bit more work. If you were being efficient, you could probably get this down to an hour or so a year. For me, it’s now a part of my normal monthly financial updates, so a few extra minutes a month.
  • Deeper awareness and understanding of investing: seeing the sausage being made isn’t for everybody! If you’re the kind of person who will be upset by a 50% fall in an individual stock, and especially if you’d then be tempted to sell it, this is a real danger. Could also tempt some into stock picking and active investing – an ISA really isn’t the place for it due to the transaction fees and US tax. If you want to do active investing, a Roth IRA makes a lot more sense.

Quantifying the tax benefits

I did some quick modeling of the tax benefits. For a basic rate taxpayer, with UK dividend tax at 8.75% (from 06Apr22) and a 0% US dividend tax rate, you need to get annual dividends above the £2,000 UK dividend allowance before an ISA makes any difference – otherwise, a GIA is exactly the same from a tax perspective, and slightly lower fee (HL doesn’t charge the 0.45%/£45 account fee for a GIA). Assuming a 4% dividend yield, you have to get to a £50,000 balance before you save a penny. But get to £100,000 balance and you’re saving £175 a year on dividend tax (all UK – assuming you stay in the US 0% qualified dividends/long term capital gains rate).

The math works out similarly for a higher rate taxpayer, with UK dividend tax at 33.75% and US at 15%. Up to £50,000 at a 4% dividend yield, you’re under the UK dividend allowance, and paying US dividend tax at £300 a year – but if the money was in a GIA, you’d be paying the same US dividend tax on that, too. Above £50,000, you’d start paying UK dividend tax in a GIA, but since the UK rate is higher than the US rate, you’d have enough passive category foreign tax credits to offset all of the US tax on the dividends above £2,000 – note that you would still be paying the £300 US tax on the first £2,000 of dividends, since it’s not UK taxable. In an ISA, there’s no UK dividend tax so you’re just paying the US 15% on all the dividends. At £100k, you’re saving £375 a year on dividend tax in an ISA compared to a GIA, and it only goes up from there

Quick math: that’s £4k a year in dividends. For the GIA, first £2k is only US taxed at 15% = £300. Second £2k is UK taxed at 33.75% = £675. US tax on the second £2k is fully offset by FTCs. So total of £975 tax in a GIA. In an ISA, it’s US tax only on the full £4k of dividends at 15%, for £600, £375 less than the GIA).

In summary, if you expect your account balance to get above about £50k, an ISA will probably save you money every year on dividend taxes. Not massive amounts unless you have a big ISA balance (to save £1k a year in tax, you’d need an ISA balance of almost £200k), but if you saved £20k a year for 5 years and then stopped, over 30 years you’d pay about £49k in dividend taxes in an ISA, and £120k in a GIA with the same investments (assumes 4% dividend yield, 3% capital growth, reinvested dividends, higher rate taxpayer). The extra fees in the ISA would add up to a few thousand GBP, but you’re still well ahead of a GIA, less than half the taxes and fees.

Capital gains is tougher to model, and realistically I think most people would be able to stay under the £12,300 annual allowance by careful management with tax-loss and tax-gain harvesting, especially if also supplemented by Roth contributions or other pre-pension investments. But it’s there if you need it, and you might also be able to stay in the 0% US long term capital gains bracket, for a total of 0% on capital gains tax.

So what?

All that said, is an ISA worth it? Honestly, it’s probably marginal for most people. There are tax savings to be had, but it has risks due to reduced diversity and it does add complexity. It’s pretty clear an ISA is not worth it in these situations:

  1. A pension/SIPP is far more tax efficient, so all your investment intended for ages after pension access age is better in a pension (at least up to the Lifetime Allowance). ISA only makes sense for money you need before 55/58/whatever.
  2. A Roth IRA is also clearly more tax efficient, since it’s recognized by both the US and UK, and you can withdraw the contributions at any time, helping with the bridge from early retirement to pension age. There will be exceptions, but in general I would recommend maxing out a Roth IRA before touching an ISA.
  3. If you aren’t comfortable with the additional risk and complexity that comes with individual stocks, accept the tax hit and use an index fund in a US brokerage account (assuming you can get/keep one, possibly using a US address).
  4. If you plan on moving back to the US, an ISA probably isn’t worth the faff. You won’t care about the UK tax advantages once you move back, and there are no US advantages.

So who is an ISA good for? Assuming you’re a US citizen in the UK, of course:

  1. You expect to be able to get above £50k-ish in your ISA in fairly short order (e.g. max the ISA for 3 years), where the UK dividend tax advantages start to matter OR
  2. You aren’t able to get non-PFIC index funds in a GIA, so you’re forced into individual stocks anyway (for example, your brokerage enforces the MiFid rules preventing you from buying US funds and you’re unable to open a different one, unable to use a US address, etc.). If you’re going down the individual stocks pseudo-indexing route anyway, the only downside to an ISA vs something like Interactive Brokers is the higher trading fees. If you’re just doing buy-and-hold investing once a year, plus dividend reinvestments and the account fee, you can keep this close to £125 a year, which is offset by the dividend tax savings once you hit a £70k-ish balance OR
  3. You’re an investing nerd and want to optimize every tax efficiency you can, and find watching the sausage being made interesting more than scary.
  4. AND you don’t mind the extra bookkeeping, the pseudo-indexing reduced diversification, and potentially the impact on your asset allocation.

I’m in buckets 1, 3, and 4, so I plan to continue with my ISA investments. I’ll move cash from Premium Bonds to our ISAs in April (and rebalance with G fund bonds in my TSP, to keep overall equities vs cash+bonds allocation in balance) and invest in the same 40 companies again. Keeping to the same 40 companies also means the dividends will double, which increases the efficiency of dividend reinvesting by reducing the number of £1 reinvestment fees I pay compared to having 80 companies. For me, I’m happy with the ISA wrapper as a supplement to my core investments in my UK pension and Roth IRA, plus legacy investments in my TSP, but it’s not for everybody.

8 thoughts on “S&S ISA Experiment – December 2021

  1. I can give you a few performance figures from my own “Stocks & Shares” ISA portfolio.

    – It’s now been running for 10.5 years. In the early years I had a few (shhh) investment trusts and ETFs, but I divested of those pretty quickly upon learning the PFIC rules.
    – I hold 32 UK company shares, with an average of 3% per company. I try to maintain a sector equal weight, which is about 4.7% per “sector”. I don’t sell an over-weight sector, but I might buy an under-weight one if a new or existing company meets my dividend yield, earnings and quality requirements. 85% of the portfolio is in the FTSE100, with the rest in the FTSE250.
    – For many years I’ve been using my wife’s ISA allocation before using my own (if I have enough to put away). She’s not a US citizen, so strictly speaking I could still hold ETFs on her side, but one day what’s hers might be mine, and I would have to divest of them.
    – I use Hargreaves Lansdown. Over the years I’ve had to move on from X-O, then iWeb. I’m actually very happy with HL. I’d be even happier if they lowered their dealing fees. Whilst the cost works out to be very low on such a large portfolio, I still think £11.95 per trade is too high in this day and age.
    – I hate paying dealing fees, so I try to trade infrequently and virtually never sell. All dividends are saved in cash and added to new contributions to buy a new share.
    – I mostly use an RPIH-adjusted internal rate of return (IRR or Excel XIRR function) to monitor performance, as well as forward estimated yield, trailing yield on the average 12-month historical value. I recently started paying for SharePad (not cheap) but I justify it on the basis I now use it for the whole family to monitor 13 different accounts (ISAs, SIPPs, JISAs, GIAs). I take RPIH data from the ONS website and compare it to my IRR, which is a bit of a kludge, but it kind of shows how my actual monetary investments general perform compared to inflation).
    – This year I sold my Abrdn (formerly Standard Life Aberdeen), in case they could be considered PFIC. I bought Fresnillo and Centamin, because I’m a closet gold-bug.
    – So, on to the figures:

    4.6% real internal rate of return (nominal IRR of 6.6%) annually over 10.5 years
    4.2% trailing dividend yield on average 12m value
    4.0% trailing dividend yield on current value
    4.7% forecast 1-year forward dividend yield
    4.8% forecast 2-year forward dividend yield
    My actual dividends in pounds is now 5% higher than pre-pandemic, but I’ve also contributed more to the portfolio. So it’s hard to judge how well total dividends would have recovered without the extra contributions.

    About 0.4% per year improvement on the performance of the FTSE100 with dividends reinvested (iShares Core FTSE 100 UCITS ETF GBP (Acc) – CUKX). I was behind the CUKX by about 0.5% this year. However, over the last 10.5 years I have very very closely tracked the FTSE100. Quite uncanny. It might diverge occasionally, but will always return to the mean. It also means that my fees must effectively be the same as CUKX’s. Of course the FTSE100 has done terribly compared to the S&P500, but I’m fairly relaxed by that. I’m essentially a value investor and don’t like the current “value” of the US market.
    Whilst RPIH is currently running at 4.6%, compound UK inflation over the 10.5 years it is an effective 1.9%.
    Annualised performance of individual companies ranges between -23% and +46% – but these outlier figures are mostly crazy because they are fairly recent purchases. As you say, you can’t really exclude the outliers, because they really do contribute to your returns (either positively or negatively).

    Now that we have reached FI, our rate of contributions will drop off dramatically. Most of our “non-discretionary” income is covered by other sources, so we see the ISA dividends as mostly “travel and leisure” money. I also run S&S portfolios for my dad (ISA & GIA) and my kids (JISAs) in just 20 companies.

    I don’t currently need to claim foreign tax credits because I no longer have earned income and don’t draw a pension (yet) and I’m using an ISA not a GIA. However, my dad does use FTCs. I am potentially concerned about the future if my dad’s foreign qualified dividends (plus any long term recognised gains) gets too high. I’m trying to get my head around the “adjustment exception” on form 1116. If his foreign dividends exceed $20,000, does he get a less favourable tax credit rate on his qualified dividends? If so, I could consider a switch to US companies (e.g. using IBKR or Charles Schwab for lower fees) but that will make things more complicated…

    The actual shares we hold in decreasing size order are:

    WPP
    ITV
    Sainsbury
    United Utilities
    BAE Systems
    HSBC
    IG Group
    Persimmon
    Marstons
    Unilever
    Anglo American
    Abrdn
    GlaxoSmithKline
    Vodafone
    BHP Group
    SSE
    British Land
    Carnival
    Aviva
    Shell
    Fresnillo
    Imperial Brands
    BP
    National Grid
    British American Tobacco
    Legal & General
    Land Securities
    Centamin
    Astra Zeneca
    BT
    Pearson
    Severn Trent

    Happy investing in 2022 and beyond!

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  2. Thanks Jeff – sounds like your much longer experiment pretty much matches my short one so far. Generally similar approach, a few differences in some of the individual holdings, but there’s a lot of overlap and with sector matching, unless one of us gets particularly lucky or unlucky, I’d expect the performance to be similar.

    My wife isn’t a US citizen, but the benefits to us of Married Filing Jointly are sufficient that she remains a US taxpayer, and I maybe only see that changing once the kids are old enough not to be eligible for the child tax credit, more than a decade from now (and even then it’ll be a close call – depends on her employment situation at the time, probably). So I make sure all her accounts are US friendly; even if we did get her out of the US system, I’d question whether it’s worth the fees, realized capital gains, and hassle to convert her 20-stock ISA to VWRA or similar, especially given the challenge that you mention, what’s hers might be mine, or her US citizen children’s’, one day.

    I fully agree on fees – HL’s £11.95 really annoys me, I try to pay it as infrequently as possible, using regular investing’s £1.50 by strong preference, although I’m otherwise happy with HL. I think the one detail where we differ is you taking dividends into cash to then use them together for new purchases, while I’m paying the £1 per dividend reinvestment. On reflection, your way is probably slightly cheaper (ballpark, I’ve got maybe 20 dividend reinvestments in a year at £1.50 each – so that’s £30 in dealing fees that could just be a one-yearly £11.95), but I’d have less cash on the sidelines waiting to be invested. And your way has slightly less recordkeeping, since you’ve got fewer lots of each stock (although it’s only for US purposes, where specific ID capital gains is easy enough to handle, and realistically I plan on selling off the full value of one stock at a time to minimize dealing fees, when the time eventually comes). Small enough that neither approach is going to move the needle compared to the other, I think, and one that’s easily changed, at least.

    You sent me down a rabbit hole on the “adjustment exemption!” Trying to piece that together across a bunch of different forms is always fun. But at the end of the day, I think you’re unfortunately right – if he has more than $20,000 in qualified dividends and no longer meets the requirements for the adjustment exception, some of the favourable treatment ends (kind of confusing whether it’s the FTC or the reduced rate on qualified dividends that’s really driving the change, but the net impact is clearly unfavourable). The convoluted way in which this is presented makes my head hurt, but it’s pretty clear that $20,000 is the red line for foreign qualified dividends. Thanks for illuminating yet another trap :/

    At some point I’ll have to think through if this impacts my situation, where I’ve got ISA dividends/capital gains, but also UK & US taxable dividends/capital gains in a US GIA but some of it is in US-domiciled funds invested in non-US assets (VXUS, VEA, etc.) that throw off some foreign dividends eligible for the FTC. I’m a long way from $20k in dividends outside pension/TSP/IRA, but someday it might be a good problem to have – although realistically, I may wind up slowly selling that GIA down to fund future ISA contributions, which just solves the problem anyway.

    For your dad, depending on the overall situation, and I know you’ve talked about the potential for a care home in the future and power of attorney, it might also be worth considering drawing down the GIA preferentially to fund current expenses, or potentially gifting now to manage future estate taxes (whether to future heirs or charity). Obviously needs to be managed as part of the whole situation, don’t want this annoying US tax clause to wag the dog of investing and estate planning, but could be something that helps resolve the annoyance, potentially.

    But aside from US tax annoyances, happy investing for 2022!

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  3. Hey, thanks a lot for researching the “adjustment exception”. That was really blowing my mind for 2020 taxes. OLT was of very little help. The IRS instructions ask “if you completed the qualified dividends worksheet” and I’m thinking “I don’t know, did I and if I did what did it look like?”. Of course the form itself is buried on page 36 of the 1040 instructions… I might try looking at TaxAct this year, just to see if they handle this stuff better. As you say, having that much in dividends is a nice problem to have. I’m thinking that if I get an inheritance I might gift the damn lot to my wife! (But that won’t help because she’d probably end up paying more UK tax than if I kept it…). As you say, no point doing something crazy just for tax reasons.

    Yes, my dad will use his GIA as first port of call for care home fees. It actually helps that there’s been almost no capital gain on higher yielding FTSE100 shares. Then of course on death the cost basis of his shares will be reset. My dad already does regular gifting to keep below the IHT threshold. I’m assuming that he needs to watch out for IHT, but strictly speaking I’m not sure he’s officially UK domiciled for estate tax purposes yet. He’s obviously a UK tax resident, although not “deemed domiciled” yet. Also, we made great strides to ensure he broke Californian state domicile. And he certainly has adopted the UK as his new and permanent and forever home. But domicile can be incredibly “sticky”. I’ve always assumed that the moment he returned to the UK forever that he established a new domicile of choice.

    I do need to start using the £1.50 regular investing feature to make one-off trades. I didn’t realise HL did this until you pointed it out. I’m rarely in the situation that I want to buy in a hurry at a specific price, so I’m happy to set up the trade a few days in advance. I’m sure they allow this loophole because few people are likely to go to the effort of using it.

    Isn’t there some ruling about switching between joint filing and filing separately that’s a once-in-a-lifetime decision? Or am I getting mixed up with something else? David Treitel said something about it.

    BTW I’ve just send a friend the contact details of David Treitel. Word must be getting around because a neighbour was asking me for US/UK tax advice… It sounds like they’ve received a US capital gains tax bill for selling a UK property in 2020 which can’t be considered a primary residence. Bad new it’s not clear if they paid any/enough UK CGT in the same tax year to offset the US tax. Good news is they are probably due some refunds for historical child tax credits and child COVID stimulus payments. They are going to talk to David today and I strongly suspect he’ll recommend the streamlined procedure or at least re-file the last few years. Not something I would attempt on my own…

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  4. Those “adjustment exception” IRS instructions are particularly inscrutable, have to say. Way too many cross-references, lots of just line numbers. I do wish IRS instructions had a section that summarized, in plain English, what they’re trying to do – what’s the intent behind the instructions? If they’d said “For foreign qualified dividends over $20,000, the allowable Foreign Tax Credit is reduced by x%”, and then provided the instructions for how to calculate it, that’d be a lot easier. I do think gov.uk is far, far better at this, and even when you get into the formal HMRC manuals, they tend to be based a lot more on “here’s what we’re trying to do here, and how we suggest you figure it out” than “here are step by step instructions but we won’t tell you what the point is.”

    I’ve just started playing with TaxAct and OLT to compare to TurboTax this year. Very initial impressions is that each will have some parts they do better than the others, but none of them is really designed to make it easy for US citizens abroad. They’ll probably all work, but they don’t make it easy. That’s just first impressions, I may find one of them is really clearly easier to use, but it feels like we may just need to pick one and learn its quirks. Since OLT is the cheapest, I might go that direction, but need to play some more first.

    Can’t speak to the domicile rules in any detail – I did look at them, but really just long enough to figure out that, by the time my wife and I are gone, we’ll clearly be UK domiciled. I didn’t go to great lengths to break my Massachusetts domicile, since they’re not very sticky for income taxes, but once our drivers licenses expire, there won’t be much of anything left linking us there. There’s some on paper linking us to Texas, but they don’t have inheritance or income tax anyway, and I’m not really expecting to be over the US limits, just the UK ones.

    I am surprised by how easy HL makes it to change the regular investing, but it is really simple to set up, turn off, change investments, change values, etc. There is a bit of a set timetable for when you can make what changes (you can change where the money is going later than how much you’re investing, that kind of thing), but as long as you aren’t waiting to the last minute, it’s plenty of time. I do wonder if they make some money on the bid/ask spread, since it’s not as transparent as an instant transaction, and they know what transactions they’ll be making in advance. But the few times I’ve dug into it, the orders have been filled at completely reasonable prices, so if there’s a cost in there, it’s minimal. They might also get some bulk discounts if they have a few hundred customers buying the same thing at the same time, closer to an institutional transaction.

    You’re right about the switch between joint and separate filings. Because of our particular situation, we kind of get two chances to change, neither of which I’ve exercised yet:
    1. Since my wife and I lived in the US together, we both had to file US taxes, and did so jointly.
    2. After leaving the US, my wife still hasn’t abandoned her green card. So she still is a US person for tax purposes, even though she’s been gone too long to use her green card to enter the US. For most people, this stickiness is just annoying and people tend to surrender their green cards as soon as they realize they need to. But for us, we’re happy to keep including her in our US taxes, so we’ll hold off.
    3. Choice #1 will be when/if we choose to have her officially abandon her green card. That will sever her US tax liabilities (after paying any exit taxes, just like a citizen, although I don’t expect we’ll be at that level of assets) and make her a Non-Resident Alien. That would push me to file Married Filing Separately or probably Head of Household.
    4. After that, we could make a one-time election to choose to have my NRA spouse voluntarily file US taxes, so we could file MFJ again.
    5. And finally, you’re allowed to revoke that election once, to get back to NRA and MFS/HoH. At that point, you’re stuck forever.
    6. Although I suppose I could also choose eventually to renounce my citizenship and get out of some of this hassle anyway, but I think I’d still wind up filing as an NRA due to TSP, social security, etc.

    We’re still on step 1, and quite happy to remain here. Only thing that would push us to surrender her green card early is if she started approaching the exit tax threshold, but that would take some sustained great years in the market. Otherwise, there’s really nothing pushing us, more benefit than pain, for once.

    If I was in streamlined territory, I’d give David a call too, that’s high stakes enough that I wouldn’t want to try to figure that out. The mistakes I’ve made on my learning curve have been minor enough they’re no big deal (even if amendments are a pain…), but that’s one you want to get right the first time. I’ve actually put his contact details in my “in case I die” letter to my wife. Basically, it says “here’s what you need to do to be fine for the next few months, but then you should get professional help – give this guy a call first.”

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  5. I want to thank you for this incredible resource (which I have shared with fellow US expats), both the blog and various online posts (we have corresponded on Reddit on ISAs and related matters). I have read this and your other posts multiple times, because it outlines what I will be implementing with my finances in the upcoming years.

    Many of my decisions regarding my US/UK investments have revolved around the question of whether I am going to go through a financial manager or try to sort this out on my own. I’ve settled on a compromise by allowing an international financial planner to manage a small portion (around 16%–as you can imagine they want a larger %) of my assets while investing the rest on my own. It’s been interesting to see that the assets under their management have performed worse than my own investments (in various Vanguard ETFs) during the same time period, not even factoring in their 1% fee. Combined with my general desire to know more about investing and its centrality to achieving financial freedom, I am leaning increasingly towards dispensing with these managers (keeping tax professionals on board of course) and trying to go it alone, as a US expat with lots of US-based investments who will be retiring in the UK and is trying to lay a foundation for that.

    However, with all that said, this still feels like quite a mess! I am not nearly as organized as you (I mean simple things like my dislike of Excel spreadsheets), and that is what frightens me about a self-directed ISA. My financial manager offered to manage an ISA for me for 1%, including the external platform fee, which made it a tempting offer, but then I’d have more money stuck with them, at a time when I’m trying to move in the opposite direction.

    So to make a long story short, although as we discussed on Reddit, I already have an H&L SIPP, I decided to open my first-ever stocks & shares ISA with Interactive Investor. I have sent in my W-9 form (at their request) so hopefully the account will be open in a matter of days. If for some reason that doesn’t work then I’ll go with H&L for the ISA, but I was thinking that I could save a bit on trading costs in my initial 20-40 stock purchases for the 21-22 and 22-23 UK tax years. Unlike H&L which charges £1.50 per purchase through the regular saver option, II doesn’t charge anything at all if you go the regular saver option, and the monthly fee of £9.99 (in lieu of platform fee) comes with a free trade every month, and these can accumulate for a few months. Plus, I should get the entire first year with II free using a cashback program (Top Cashback). So I think these are all good reasons to opt for II instead of H&L in the first two years, and then maybe transfer to H&L to take advantage of their £45/year cap, once most of the stocks I want in my portfolio have already been purchased (for free via II). Does this make sense to you? Part of me knows that obsessing over these small details may be excessive when thinking about £20k/year investments, but like you I have a passion for saving even in small ways.

    Regarding the ISA and time management (the part that scares me the most), do you think it would be possible to buy £20k of stocks at once, completely forget about them for the rest of the year, and then check back at the end to calculate any dividends for US tax purposes? In other words, is this the kind of thing that one could buy and forget about, like an index fund? Or does one need to carefully monitor the rise and fall of the stocks?

    Finally, your calculations of cost benefits for ISAs are extremely helpful. Given that it’s quite possible that I will exceed the £2k dividend allowance threshold just from my US-domiciled taxable investments (all in HMRC reporting funds, as I shift to arising basis taxation), it seems like an ISA is even a more obviously good choice in my situation, right? I mean: what you say about GIA vs ISA applies equally to taxable accounts in US brokerages via ISA (for arising basis taxpayers), right?

    Anyway, it’s so refreshing to have found a forum to discuss these issues, since I did not grow up in a financially savvy environment, and as you know few people in the UK (or US!) face the issues we do. I think it has mainly been the need and desire to discuss these issues that has driven me towards the financial planners I have worked with, but I consider the majority of these to be a waste of money and potentially also time. At any rate, there is simply no comparison between your advice and theirs in terms of its overall usefulness, honesty, and transparency, which makes it difficult for me to believe that you are not a financial professional! So thank you again for your contribution to the community. I’d love to know of any further resources which offer a forum for discussing these issues (I hate Facebook but I have just applied to join the groups recommend on this site, and am already on all the relevant Reddit groups).

    PS: “The ISA Experiment” sounds like a great book title, something relevant to a British audience as well as US/UK.

    Happy New Year!

    Liked by 1 person

    1. Thanks for reading, commenting, and sharing! Glad to have company on this journey, and perhaps slowly build a (small) community of people interested in investing through the challenges we face.

      I have an almost instinctive dislike of using asset managers, probably a stronger dislike than is truly merited. I expect my sample is biased, because I’ve mostly heard horror stories and not many people saying “I love my financial advisor!” – especially not if you look below the surface, and realize they love having somebody to talk to and offload the mental burden, but are actually paying a ton of fees to underperform the market… But at this point I’m a fairly strong Boglehead, so I’m all about minimizing fees and “buying the haystack”, with very little confidence that active investing can beat the market, especially net of fees. That includes me – my ISA only hopes to match the FTSE 100. I do have a few small play positions in my Roth IRA, although they have certainly NOT beat the market lately!

      Tax professionals are a different story, as are legal and estate planning professionals. There’s clearly benefit to expertise there, and, if I can find good ones, I would use their services as and when needed. We spent some money this year getting our wills, powers of attorney, etc. sorted out, and that’s money well spent in my book. The challenge is finding good ones that understand US and UK taxes and how they interact – those seem to be very rare, and there are far too many advisors out there who are happy to take your money for bad advice.

      All that said, if somebody offered to manage an ISA in a fairly passive way for 1% total fee, that would bear consideration. I would very happily buy VT via an advisor and let it go, or if they offered direct indexing, that would also be of interest. The critical thing, of course, would be to make sure that whatever they invest in is US tax friendly – don’t need them buying a bunch of PFICs for me. To me, the biggest drawback of my ISA approach is the lack of diversification – 20 or 40 stocks is decent, especially for the UK market, but I would pay a little extra to get a nice broad index fund in a US-friendly way.

      Your approach for II seems perfectly reasonable. I have no experience with II at all, but I’m all for saving a few pennies if possible. I also don’t know how easy it is to transfer ISAs – it’s absolutely possible, but have seen a few reports of people struggling to get brokerages to talk (not II or HL specifically, I don’t remember the brokerages involved, just that it may not be 100% smooth).

      I do think it would be completely possible to spend a few minutes in March/April setting up your annual purchase via regular investing, a few minutes in April/May after the purchases go through to update cost basis, turn off the regular investing, and invest any remaining cash, and then a bigger chunk of time in January/February to consolidate and update dividends, and also update cost basis for any dividend reinvestments or other corporate transactions (mergers, acquisitions, return of capital, etc.). I personally choose to do the recordkeeping on a monthly basis, so it’s less to do all at once and I don’t forget how to do it year to year, but it’s probably actually more efficient just to do it once a year, and I may shift to that eventually.

      You’re very likely better off NOT monitoring the rise and fall of the stocks. I do that too much! Although it’s becoming less frequent. Ironically, I check on the £40k in my ISAs far more frequently than I do the much larger investments in my TSP and Roth IRAs, although those are almost all boring index funds. Ignoring the ISA for a year is probably better than looking at it, and almost certainly better than taking any action based on looking at it (which I haven’t done, at least). Pick your 20-40 stocks, buy them, and ignore them until next year – that’s as close to passive index investing as we can get in an ISA. In my defense, I was doing an experiment and wanted to keep an eye on them, but at this point I’m comfortable looking less – maybe I’ll get down to once a month when I do my monthly spreadsheet updates.

      If you’re already exceeding, or close to exceeding, the £2k dividend allowance from US taxable investments, that does push you towards an ISA, for sure. After talking with Jeff the other day, there’s actually another advantage here – if you can keep all your UK-taxable dividends under the allowance, your US Foreign Tax Credits are a lot easier to calculate. There’s no UK FTCs for the dividends, so they’re just all US taxable, simple (and avoids the additional headache of US-source dividends getting taxed by the US first, while non-US source ones are taxed by the UK first, I think – don’t even want to go there). Even easier if you don’t have any UK taxable capital gains that year – you literally have no passive category FTCs at all because you’ve paid no UK tax on any passive income, and only have to worry about general category FTCs on your income, which is pretty straightforward if you’re PAYE.

      That does give you quite a bit of room to maneuver, if you’re using your UK pension/SIPP, plus Roth IRA, plus ISA – keep your GIA dividends under £2k (call it £50k at 4% yield on UK stocks, maybe £100k at 2% on US ones) and GIA capital gains under £12,300, and your passive FTCs are a non-issue. You do get to pay the US, unless you have some other credits, of course.

      And to be clear, yes, what I say about GIA vs ISA applies equally whether the GIA is US or UK based – makes all kinds of differences for being able to invest in US funds, but makes no difference at all to the taxation (on arising basis – I know very little about remittance basis aside from it existing and it being a headache I didn’t want to bother with since very little of my non-UK income is outside tax-advantaged accounts, anyway).

      I am not a financial professional, just an enthusiast. My dad was an accountant & CPA, but nothing at all to do with foreign entanglements, that’s the closest I can get. I have my personal finance merit badge from 20+ years ago, maybe that counts? 🙂 But I have to add my disclaimer – everything I know is from self-education, I don’t think there are any big things I’m missing, and I try to be transparent about calling out where there are grey areas, but for any more definitive answers, you’d need a professional.

      Two other good resources/communities:

      UK Yankee forum is especially good for taxes, the “Money Matters” section is mostly about basic banking and such, but the tax section is the best forum I know for US/UK tax questions. It’s not super active, a few posts a day, but also a wealth of knowledge in the history: https://talk.uk-yankee.com/index.php#c2

      The Bogleheads Non-US Investing forum is the best I know for non-US investing. It’s all non-US, they don’t have a UK specific forum, so there’s a lot of stuff that you can just ignore, but there’s good UK content and a few really contributors: https://www.bogleheads.org/forum/viewforum.php?f=22 Their other sections are good for overall investing discussion, although mostly US-centric. The audience tends a bit older and more experienced than Reddit, which has its pros and cons.

      I have vaguely considered trying to consolidate some of this stuff into a book – a project for another time. I’m sure it’s not commercially viable, the market is just too small (I think even generic UK investing books are barely commercially viable, much less narrowing to the US-UK investing population). But it might be something I do as a passion project some day.

      Happy New Year!

      Like

  6. I personally wouldn’t dream of managing a US/UK tax-compliant share portfolio if I didn’t like using spreadsheets. Collecting dividend information for the “other” country’s tax year using your broker’s transaction history or reporting tools might be easy enough. But monitoring any capital gains/losses using the correct exchange rates for all buys and sells (short term and long term) would be difficult without a spreadsheet. If it’s an ISA you won’t get a tax statement from a UK broker and even if it was a GIA it would cover the wrong tax year and not take account of the changing exchange rate. Even if you tried to avoid selling shares, sometimes you are forced to due to certain corporate actions. Also, I’ve never been happy with the performance reporting tools of any brokerage. They never seem to tell you the information you actually need. Most of them can’t even tell you how your portfolio or individual shares have performed after accounting for dividends. And they certainly don’t tell you how it’s performed after accounting for fees. I think a 1% fee on top of the platform fee is way too high – especially if you are just trying to recreate a tracker.

    I used to think I could potentially use a US brokerage for some US shares and a UK one for my UK shares, but I’ve decided that filing for foreign tax credits, at least on the US side, is just too complicated (especially if you have other sources of income such as earned, interest, re-sourced by treaty, state benefits, etc). I still can’t fully get my head around the “adjustment exception”, “carry back and carry over”, “US capital loss adjustment”, “capital gain rate differential adjustment (for net capital losses and/or gains)”, “allocation of foreign losses”, “allocation of US losses” and potentially even “recapture of prior year overall foreign losses”… (See Publication 514 and weep). I can’t imagine anyone in their right mind does all this stuff without using a tax professional (or they just don’t make the FTC claim, or they do it wrong). I very much doubt that any of the retail tax preparation software will all this stuff properly for you either. So I’m sticking to a SIPP (which has it’s own potential reporting risks), UK shares in an ISA (or perhaps a GIA), and an IRA. Better than all of these would be an employer sponsored pension scheme or 401k for an easy life – as long as you can choose a low cost global tracker fund. So I sold my last remaining individual US shares (outside an IRA) in 2021.

    Liked by 1 person

    1. Jeff, I agree everyone doing any investing outside pension/SIPP/IRA/401k definitely needs a spreadsheet, for all the reasons you’ve said – I’d argue anybody with all but the simplest taxes needs a spreadsheet! It could be something you only update once a year, although I don’t really recommend it – it’ll be a big task, and probably something that comes with a sense of dread. Doing my updates monthly, I’m just like “it’s the first of the month, time to spend 30 minutes updating my financial spreadsheet (that 30 minutes includes dividends, but also checking asset allocation, updating all account balances, and tracking spending – the rest of that isn’t required for taxes, the dividends could be done in 5 minutes or less).

      I think 1% all-in is unfortunate, but not unreasonable (I think that’s what expat was saying, not on top of platform fee). Vanguard’s all-world fund that a UK investor might hold in an ISA is 0.23%, which is about as cheap as you can get. Add on a platform fee – let’s call it 0.27% for round numbers, that gets you to 0.5% as a baseline that a “normal” UK investor would pay. So there’s an extra 0.5% fee to have somebody else manage it for you. If that a) ensures US tax friendliness b) increases diversification from 20-40 stocks to the whole global market and c) gives you a report for US taxes on dividends and capital gains (one number each, not a bunch of calculations to be done), I can see the value. On a £20k ISA, that extra 0.5% is £100 a year. Now, I don’t think it’s a GOOD deal, but it’s not terrible, and if it opens up an ISA as an option for people who don’t want to get their hands dirty, it would be interesting. However, if it was 1% plus platform fee plus fund fee, no way, not interested. Although that’s still better than the terrible options that lots of people have in their 401k (or 403b, which seems to be a hive of scum and villainy), and on par with some of the worst pension offers (0.75% on crappy active funds).

      I do think there’s a very good case for keeping UK-taxable investments under the £2k dividend, £12.3k capital gains, and personal savings allowances to avoid the complexity of foreign tax credits. That includes US and UK brokerage accounts, makes no difference which one, or both. I have some passive category foreign tax credits, mostly from selling investments to buy my house and from liquidating my non-UK-friendly 529, but they avoided most of the complexity you mentioned (not enough for the adjustment exception, no capital losses just gains). Carryback was a pain (which the BBB bill might still eliminate, anyway), carryforward is straightforward enough but not terribly useful unless tax rates change – I’ll just build up more and more until they expire. Carryforward is just another tab on my long term tax spreadsheet 🙂 I won’t guarantee I was 100% correct, and it was certainly more convoluted than the FEIE, but got there in the end and I’m confident any errors are immaterial. Moving forward, UK taxable dividends and capital gains should be under the allowances. I struggle to keep my interest under my £500 personal savings allowance, because of a chunk of series EE bonds my parents bought for me long ago, but interest is the simplest of the lot.

      Definitely agree that TurboTax wasn’t much help sorting this out – had to torture it to do what I wanted. I don’t think any of the options will do well – I also think most paid professionals would screw it up 🙂 I’ve seen people use H&R Block or whoever and make a mess of it, even some of the “expat tax specialists”.

      And agree that the simplest approach is workplace pension + IRA (and if you have cash that’ll throw off significant interest, put it in premium bonds or a cash ISA so there’s no UK tax to worry about). 401k is fine if you already have one. Next layer of complexity is SIPP instead of pension, still pretty simple aside from the 3520/3520A question. Then it’s a significant step up to an ISA, and another big step up to taxable (US or UK) – this is where I am, although my taxable stuff is simple (VTI, VEA, and a little BRK.B) and will eventually go to an ISA, with modest long term capital gains under the UK allowance. And then another step up if you want to hold US investments in taxable and have dividends above £2k a year, you want to do tax loss harvesting in taxable, crypto, etc. – this is more than I want to take on!

      One modest optimization to the simplest option is to make sure your US shares are in an IRA or 401k, not your UK pension. There’s 15% dividend withholding built into Irish and UK domiciled funds – you won’t see the drag, but it’s there (30% if you have any Luxembourgish funds), and as a US taxpayer you wouldn’t need to pay any US dividend tax in a tax-advantaged account. On a 2% US dividend yield, that’s the equivalent of a 0.3% extra expense that you don’t need to pay. So if possible, put US in IRA (and 401k, if available), and ex-US in pension, instead of a global tracker. In practice, that means my pension has funds for UK, Europe, Japan, & Developed Pacific ex-Japan, plus gilts, since there’s no single ex-US option in my UK pension so I build it up from those 4 funds. I put EM in my IRA just because my pension EM fund is expensive – it’d be fine in my pension if the option was better.

      Like

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