My Asset Allocation (Part 2)

14Apr21: I edited my approach to where to put bonds, based on my post on Required Minimum Distributions.

In Part 1, we discussed the first three of my six steps for asset allocation:

  1. Why are you investing? What are the goals?
  2. What broad asset categories do you want to invest in? Stocks vs bonds, US, UK, International, etc.
  3. What are your percentage targets for each of those asset categories?
  4. Which account types will you use for each asset categories, considering tax treatments?
  5. Which funds will you use in those accounts to achieve the overall asset allocation?
  6. How and when will you rebalance to maintain your target asset allocation?

This post will wrap up with the second half of the list.

Asset Categories & Account Types

Bogleheads has a good primer on tax-efficient fund placement – it’s specific to US investors, but the general concepts apply for Americans investing in both the US and UK, even if some of the numbers will vary (the US and UK systems for taxing capital gains and dividends are very roughly similar).

For more details on any of the account types mentioned below, I’ve put together summaries linked here.

By the nature of the investments I choose, I avoid really tax inefficient options – REITs, high-turnover active funds, and high-yield corporate bonds. The fact that these are tax inefficient just adds to my reasons for not investing in these.

That means the most tax inefficient investments I have are bonds. I keep all my bond funds in a tax-advantaged account that are recognized in both the US and UK: my TSP (similar to a 401(k)). It would also be fine to have a bond fund in a UK pension (including SIPP, as long as you agree it’s a pension) or in a Roth IRA, but there are other advantages to putting bonds in a Traditional IRA or 401(k) account (see my post on Required Minimum Distributions). I also have a number of individual US savings bonds – there’s no choice to hold these anywhere except a taxable account, so there they are.

Individual stocks only live in my S&S ISA (because I don’t want PFICs there), and some RSUs from an old employer that stay where they are because they’re already there. That company won’t be paying dividends anytime soon, so unless I sell, there’s no taxable events there. An IRA is also a perfectly good place for individual stocks, if you particularly want to invest in them.

That just leaves stock index funds. It probably doesn’t really matter where you put these – there are some arguments for where to put US vs non-US and so on, but these are tweaking around the edges. My approach is a combination of simplicity plus taking advantage of accounts where I can get particularly low-cost funds.

  • I keep my taxable account simple, to try to keep my taxes simple: this is all US total stock, in a single index ETF which is HMRC reporting
  • I take advantage of low fees where they’re only available in specific places.
  • After that, it’s just splitting across the account types (TSP, Roth IRA, and UK pension) to achieve the target asset allocation

Fund Selection for Asset Allocation

I’ll quickly run through the funds I use in each of my account types. These are not specific recommendations for these funds – I’m not trying to sell you anything! Just what works for me, do your own research 🙂 There’s nothing extra special about any of these funds, they’re mostly pretty typical index funds.

My key rules, in rough priority order:

  • No PFICs outside pensions
  • No funds that aren’t HMRC reporting outside pensions
  • Minimize costs
  • Follow tax-efficient asset allocation, as described above
  • Keep it as simple as possible
  • US Taxable Brokerage Account
    • 100% Vanguard Total Stock Market Index Fund ETF (VTI) – very low expense, covers the whole US market
  • US Treasury Bonds
    • A chunk of Series EE bonds – my parents bought these for me when I was much younger; they’re now at very competitive interest rates, so I hold on to them to maturity. If you have a 20 year time horizon, these are still an attractive investment for new money, since they’re guaranteed to double in value in 20 years, about a 3.5% interest rate. But if you sell at 19 years and 11 months, you get the pitiful rates of today (0.1% as I write this).
  • US Roth IRAs
    • Vanguard Extended Market Index Fund ETF (VXF) – low expenses, need a bit more small/mid cap to get to my target allocation
    • Vanguard Emerging Markets Index Fund ETF (VWO) – low expenses for the category, this is essentially all of my emerging markets allocation
    • Some more VTI, to get to the target asset allocation.
    • Vanguard Total International Index Fund (VEU) – I don’t have any here at the moment, but its on my list if I ever need it to get to my target international allocation.
  • Thrift Savings Plan
    • I know most of you won’t have access to the TSP, unless you’re a current or former US government employee. It works very much like a 401(k), but has a very short but good list of investment options (all low-cost index funds). If you don’t have a TSP account, you could do something very similar in a good 401(k), or in an IRA you’ve rolled your 401(k) into.
    • International (I Fund): The lowest expense international fund I can find, it’s the core of my international holdings.
    • Large Cap (C Fund): Basic S&P 500 tracker. Combined with VTI, it makes up my US large cap exposure.
    • Small Cap (S Fund): Slightly misnamed, this is really mid and small cap – very similar to VXF. A chunk of my US mid/small cap allocation
    • Fixed Income (F Fund): Mix of about 70% US government bonds, 30% US corporate bonds. The remainder of my bond allocation, after the savings bonds.
    • Government Bond Fund (G Fund): this is a TSP-unique offering, US government bonds issued just to this fund and not traded on the open market. I’m not currently using it, but when I increase my bond allocation in retirement, I likely will.
    • Fixed Income Fund (F Fund): a basic, broadly diversified US bond index fund. I don’t currently use it (BND in my IRA plus savings bonds are enough for my US bond allocation), but certainly would if I needed to.
  • UK Pension
    • Your options will vary tremendously based on the exact plan your employer has selected and who is administering it, so I won’t give specifics on the funds I use. Depending how good or bad your options are, you may even need to readjust the rest of your allocations – I remember having a 401(k) in a previous employer that was so bad I just had to pick the worst of a lot of bad options, and make up for it elsewhere. Even if you only have bad options, it’s worth at least getting the employer match – that’s free money and an instant return!
    • UK Equity Index: you’ll find it challenging to buy a UK index fund outside of a UK pension/SIPP. It’s a PFIC in a S&S ISA, and I haven’t found a UK-only index fund that I’d want to own in a US account. So if you want UK-specific exposure beyond what is already in an a total international fund, this is a good place for it.
    • Ex-UK Equity Index: This goes into a bit of a mix of different asset categories, but works fine to accept my pension contributions. I can tweak other investments to maintain the overall allocation. In my pension, this is a very low cost option, too.
  • UK Stocks & Shares ISA

Rebalancing for Asset Allocation

Rebalancing is simply tweaking the proportion of investments in individual funds in order to maintain the overall target asset allocation. It’s a necessary process – otherwise your allocation will drift as some categories perform better than others, and you wind up over-concentrated in recent winners (which might be primed to underperform), and under-concentrated in recent losers (which might have more room to grow next).

I use two ways of rebalancing:

  • Preferred: adjust where new money goes.
    • I put my annual Roth IRA contributions in the right place to bring up any categories that are low, and occasionally tweak my monthly UK pension contributions to adjust the mix.
    • This has the advantage of not triggering any capital gains, no hassle with selling and buying – it’s easy and free.
    • I am missing out on the possibility of tax loss harvesting in my taxable account, but the simplicity is worth it to me. Plus, my taxable account is a pretty small amount of my overall investment – if it was bigger, this calculus might change.
  • As necessary: sell overweight categories and buy underweight ones.
    • I don’t do this in my taxable account – that’s why it’s all in one investment, it can just stay there and do it’s thing, and I avoid taxable capital gains.
    • Occasionally I need to do this in my TSP or Roth IRAs. TSP is easy (I just type in the new percentages I want and they adjust it overnight), but in an IRA you need to sell one ETF and then use the cash to buy another.
    • This isn’t taxable within the IRA wrapper, but it’s a bit of a hassle, and there’s a risk of the market moving while you’re in cash, missing out on gains (or losses!). So I limit this to roughly annually, usually about the same time I do my Roth IRA contributions.


That’s really all there is to asset allocation! There are a few tweaks to account for US/UK taxes and available accounts, but the overall concept is the same for any investor. I hope this was a useful description, and appreciate any comments or questions (or telling me I’m doing something stupid!).

My Asset Allocation (Part 1)

Many of you will already be familiar with the idea of asset allocation – I don’t need to repeat the excellent explanations already out there (here’s a great primer from Bogleheads), but I did want to explore how I arrived at my own asset allocation and how you might go about thinking of yours.

I think of asset allocation in six steps, and will walk through each of these in this two-part series:

  1. Why are you investing? What are the goals?
  2. What broad asset categories do you want to invest in? Stocks vs bonds, US, UK, International, etc.
  3. What are your percentage targets for each of those asset categories?
  4. Which account types will you use for each asset categories, considering tax treatments?
  5. Which funds will you use in those accounts to achieve the overall asset allocation?
  6. How and when will you rebalance to maintain your target asset allocation?

Why am I investing?

My long term objective is retirement – ideally an early retirement in my early 50s. That’s far enough away for me (15 years, give or take) that I’m investing for the long term. Since I’m hoping for a long retirement, I’m also not planning on a super-conservative asset allocation immediately when I retire.

This pushes me towards an investment approach that accepts volatility in exchange for higher returns – mostly equities.

What asset categories do I invest in?

Personally, I keep it simple – stocks and bonds from across the world, mostly via index funds. There are lots of other asset classes you could look at: real estate, cryptocurrency, commodities, etc. To me, these add complexity (including tax complexity) without a good reason.

In particular, I’m hesitant about investing in anything that doesn’t have underlying growth. A company wants to be profitable, a gold coin or a bitcoin just wants to sit there. There’s a place in some portfolios for hedging using these kinds of investments, but for me, keeping it simple makes more sense.

For real estate, I don’t want the hassle of actually owning buy-to-let property at this stage in my life – I have enough work with my day job, and want to use my spare time for things I enjoy as much as I can. I can see an argument for REITs (in a US/UK tax efficient location!), but owning a house within London commuting distance is enough real estate exposure for me.

That leaves me with plain old stocks and bonds, which is a nice place to be.

What are my asset category targets?

I like the simplicity of a 4-fund portfolio, splitting between US vs International stocks and US vs International bonds. However, I’m living in the UK and intend to live here indefinitely – so how does the UK fit into that?

There’s one school of thought that “true” index investing is simply matching the market – trust that the mass of investors has it about right, and we should match the average. For stocks, that means about 56% in the US, 7% Japan, 5% China, 4% UK, and so on down the list, matching global market cap. This is a completely logical approach, and I honestly can’t fault it.

But, I like a bit of tweaking. Not going too far off the reservation, but working on the edges. I’m also considering which investments are easy to buy at low cost in the accounts that are available to me, working within the various restrictions from both the US and UK.

I’m of the strong opinion that the exact percentages of an asset allocation don’t matter all that much – what really matters is that you pick something you can live with and stick with it. Where value really gets eroded is if you keep changing your allocation, chasing today’s hot categories, selling low and buying high. I’m certain that my allocation isn’t the best possible allocation – nobody knows what the perfect allocation is except in hindsight. But it’s good enough and I can stick with it.

For me, that winds up looking like this:

The first question is the overall stocks/bonds split – I go with 90/10 for now. This is aggressive, but a) I don’t need this money until retirement; b) I have no worries about job stability – I can’t see any plausible scenario where I unexpectedly need this money; and c) I know my own risk tolerance. I’ve tracked my investments through both 2008 and 2020 crashes, and I didn’t sell, I kept buying every month. So I’m comfortable with only 10% bonds at this point – I will increase that percentage in future as I enter retirement. You may want something less volatile, and that’s totally ok. You might also be comfortable going 100% stocks – if that works for you, also great.

Getting into the components of that overall split: bonds first, because they’re easy. I have a simple 50/50 split between US and International bonds. Bonds as a whole are only 10% of my portfolio, so any adjustments here are tiny – there’s not much practical difference between 5% and 5% vs 7% and 3% or whatever other allocation, as long as there’s some of both. So I keep it simple.

Update 14Apr21: Based on my research into how to manage Required Minimum Distributions, I’ve decided to move as much of my bond holdings as possible into my TSP (similar to a 401(k)). The TSP doesn’t have an international bond option, so I’m now using 10% US bonds, no international. I don’t expect this to have any significant impact – I’ll move towards 5% US, 5% international once I eventually roll this over to a Traditional IRA.

For stocks, I split into 3 big buckets, with two of them further subdivided – percentages are of total portfolio, so they add to 90%, with the other 10% bonds.

  • 45% US stocks
    • 25% is large cap
    • 20% is mid/small cap – this is overweighted because they tend to have higher long term returns, albeit with higher volatility. I’m happy to ride out the volatility. It’s also easy to buy US mid/small cap in cheap index funds – much harder to do that for other countries. Edit 18Aug21: I’ve since decided to revert to the index weighting – my only tilt now is UK. I’m not convinced that the mid/small cap premium isn’t already priced in, so I’m going full Boglehead.
    • On the whole, this is close to the US’s overall market cap (50% of equities instead of the actual 56% – close enough for me)
  • 10% UK stocks
    • This is almost double the UK’s representation on the global market, but I’m deliberately choosing a bit of home bias.
      • A little of this is because a component of this allocation is individual stocks in my S&S ISA, and I am more comfortable doing individual stocks in a country I understand, plus the fees are lower for UK stocks.
      • A little is for currency fluctuations, although most big UK companies are hugely exposed to currency risk – they’re big because of large non-UK operations, it’s tough to get really big just within the UK.
      • And a little is basically just rooting for the home team – I’m ok with that 🙂
    • This is very nearly all large cap, with just a tiny bit of mid/small cap through index funds. I’ve looked at adding in more mid/small cap and might do that in the future, for the same reason as for US mid/small cap. For the moment, it’s more of a pain to find a good mid/small cap UK fund – what I’ve found is pretty expensive and/or a PFIC that I don’t want to hold outside my UK pension. I’m also not comfortable picking individual mid/small cap stocks, at least not yet.
  • 25% Other Developed International
    • This is almost exactly the remaining market cap for developed economies, after taking out the US and UK. I’m not taking any particular bets on which developed economies will perform better than others, spreading my investments across the globe.
      • For purely mechanical reasons, I’m underweight on Canada – that’s just because the TSP I fund doesn’t include Canada, as it tracks the MSCI EAFE (Europe, Australasia, Far East) index, and the I fund is a big part of my international investment. I briefly looked for Canada-only funds to fix this, but didn’t find anything. Canada’s stock market isn’t big enough that this worries me – sorry Canada!
  • 10% Emerging Markets
    • This is also almost exactly the overall emerging markets market cap. I’m hopeful that some emerging markets will outperform the broader stock market, but also realistic that some will underperform. I’m not placing any bets on which are which.

Within all of the above, I also allow myself up to 5% “fun money” – this could be individual stocks, sector specific funds, etc. At the moment, the only thing I have in this bucket is some RSUs from an old employer which are about 1% of my total investment, but if I want to buy a little GME to the moon, I’ll allow myself to do it 🙂

For my answers to the second half of the questions, please continue on to Part 2.

US Traditional IRA (Account Options)

This is an option with a big question mark, even if the question is answered favorably, it’s still relatively limited, but I wanted to include it in the list of account options to be comprehensive. I’d be interested in your thoughts about how you use it as an American in the UK, if you do.


US tax deductible, if you’re eligible, and tax deferred.

UK tax deferred at least, big question if it’s UK deductible.

If it’s not UK tax deductible, it’s fairly useless for most people, except as a means to a backdoor Roth contribution. I won’t cover the backdoor Roth here, but will go into that in the future.

The Big Question

Before explaining further, it’s worth going into this question up front: can you deduct contributions to your US Traditional IRA on your UK taxes.

Why is this so important? If you can’t deduct the contributions from your UK taxes, you’ll probably have enough Foreign Tax Credits from your UK taxes that the deduction on your US taxes doesn’t change anything (you still owe nothing to the US, typically, due to the FTCs). In that case, there’s no real advantage to a Traditional IRA – you’re better off with a Roth IRA in almost any case, even if you get there via the Traditional IRA.

Argument for UK Deductions

Paragraph 2 of Article 18 of the US/UK tax treaty says, in plain English, that for a person with a pension in the US but working in the UK, contributions to the US pension while working in the UK are deductible in the UK. If the Traditional IRA is a pension, Traditional IRA deductions by somebody working in the UK but with a pension in the US are deductible in the UK.

Arguments against UK Deductions
  1. The Savings Clause (Article 1 Paragraph 4) says that the UK can tax its residents as if the treaty didn’t exist, with a short list of exceptions. Paragraph 2 of Article 18 referenced above is not on that list of exemptions – therefore the UK can ignore it and you can’t deduct your IRA contributions.
  2. The Traditional IRA doesn’t have a UK counterpart “pension”, so it doesn’t count. I think this is the weaker of the two arguments – Traditional IRAs are on the list of products that the countries have agreed are pensions, and you could argue a SIPP is somewhat comparable.
Bottom Line

I can’t make this call definitively, although I’m leaning towards “not UK deductible” – if you really want to rely on a Traditional IRA being UK tax deductible, you probably should talk to a lawyer, or at least decide for yourself. For me, it’s just not useful enough to be worth the chance that it’s not deductible, so why take that chance?

  • The contribution limits are relatively low – if you want to make UK-deductible savings contributions, use a UK pension or SIPP. They have their own treaty questions, but I think they’re clearer.
  • The eligibility for US tax deductions is fairly limited (details below).
  • Put those together, and best case you’re making about $105k a year (married filing jointly), which is about £75,000, so you’re in the higher (40%) rate bracket for UK taxes. If you contribute the max $6,000, that’s a $2,400 (about £1,700) savings on your UK taxes, potentially double that if you and your spouse both contribute. I’m not going to turn up my nose at a “free” £1,700 every year (they tax you on the back end, of course), but given the uncertainty and the other options available, I just don’t see it as a strong option.

That said, the details below may help you do your own evaluation and see if a Traditional IRA is something you’re interested in. If you have a different interpretation, I’d also be very keen to hear it in the comments!


If it’s UK deductible, you’ll probably have this in the same priority position as a Roth IRA – you have to pick one (or split the limit between them).


You must have earned income – foreign earned income is fine, as long as you don’t exclude it from your US taxes via the Foreign Earned Income Exclusion. The Foreign Tax Credit is typically the better option, anyway.

There are somewhat restrictive income limits if you want the contributions to be deductible. For 2021, they deduction starts to phase out at $65k (single), $105k (married filing jointly), and $0 (married filing separately – yes, that’s zero dollars, it’s pretty much useless if you’re in this situation). These assume you’re covered by a retirement plan at work, but since the UK requires employers to provide a pension, you probably are. You can still contribute if you’re above these limits, but can’t deduct the contributions on your taxes.

You may find it challenging to keep an IRA with a foreign address, and may find your investment options limited.

You probably can’t start contributing to a Traditional IRA from the UK if you didn’t open it before leaving the US, at least not if you want to deduct the contributions on UK taxes based on the US/UK tax treaty (some people also think the tax deferral advantage in the UK also depends on having the IRA open before moving, but I think that’s an overly restrictive definition – more details in my Roth IRA post at the bottom). Definitely worth some professional advice if you want to try this – it’s not 100% certain, but I tend to agree with this interpretation.

Investment Options

You can invest in anything you want, that your broker will sell you (possibly no US mutual funds or ETFs, due to the UK/EU MiFID/PRIIP rules). No concerns about HMRC reporting funds.

This is almost as good as a Roth IRA for any of your weird, super high risk/high return investments. You’ll eventually pay taxes on your 1000x returns when you withdraw, but it’s deferred until then.

Risk & Return

Entirely dependent on what you invest in. Capital at risk, no guarantees.

Withdrawal Options

Earnings can be withdrawn at 59 1/2 or older and you’ve held the account 5 years or more, without penalties. Under 59 1/2 is typically penalized, with some exceptions for home purchases, education, disability, and death. If you need to do this, you’ll want to check in to how the UK treats early withdrawals.

You have to start taking withdrawals, called Minimum Required Distributions, from age 72 – the IRS wants to tax you some day!

Contribution Limit

$6,000 per year, per person in 2021. $7,000 if you’re over 50. The amount is shared with a Roth IRA.


These will depend on your broker, but typically the account is free or nearly free, with transaction fees depending on what you invest in (there are likely some free mutual fund and/or ETF options).

There will also be fees on the underlying funds, if you go for mutual funds or ETFs. You typically want to try to keep these low, under about 0.1% for an index fund.

UK Tax Treatment – Contributions

See the Big Question up above – maybe UK tax deductible, but I lean towards not.

UK Tax Treatment – Withdrawals

The UK recognizes the US tax advantages, so taxes on capital gains, dividends, and interest are deferred until withdrawal. Withdrawals are treated as income and are fully taxable.

US Tax Treatment – Contributions

Contributions are deductible on your US taxes, subject to the eligibility limits.

US Tax Treatment – Withdrawals

All withdrawals are taxed as normal income, both contributions and gains.

UK Premium Bonds (Account Options)

Premium Bonds are a very unique type of account – a savings account crossed with a lottery. I think they’re pretty neat, and a nice, safe way of making short term savings a little fun.


Premium Bonds don’t have any parallel in the US, so a quick explanation of how they work: you deposit your money in the account via National Savings & Investment (NS&I), part of the UK government. Your capital is guaranteed by the UK government – if the government goes bust, you’ve got bigger problems, so this is about as safe as you can get. But you don’t get any guaranteed interest – instead, each £1 is entered into a monthly drawing to win prizes, ranging from £25 to £1 million. The “prize rate”, the total amount they pay out, is typically similar to a savings account, although at the time of writing in March 2021 it’s a bit better (1%, compared to 0.5% or less for a good savings account).

They’re also UK tax free, but fully taxable like a savings account in the US, which is a bummer when you win the £1 million.


Short term savings, the prize rate isn’t going to compete with an index fund.

They are a nice choice for emergency funds that you don’t completely immediate access to (NS&I can take a couple of days to move money to your current/checking account).

They’re also a responsible substitute for lottery tickets 🙂


UK residents age 16+ – you can also buy them for children. Note that you can’t keep them if you move back to the US, because of the way the US treats lotteries and gambling generally. No penalty, would just sell them and move the money elsewhere.

Investment Options

There are no different flavors of premium bonds, just the one product. NS&I does offer some other savings products that are similar to savings accounts from banks with similar interest rates – they do have the advantage of being backed by the UK government, rather than the £85,000 FSCS protection limit.

Risk & Return

Zero risk to capital, unless the UK government defaults.

Significant risk that inflation will be higher than the prize rate, or your actual winnings.

Some risk that you will be unluckier than average and win significantly less than the prize rate. The larger your investment, the closer you will likely get to the actual prize rate, because of the way the math works out. MoneySavingExpert has a handy calculator showing this – it’s a fairly simple concept but some heavy duty math.

Withdrawal Options

Withdraw anytime to your current account. NS&I does take a couple of days to move money (more like a US ACH transfer than your typical near-instant UK bank transfers).

You can choose for your winnings to be reinvested or paid out to your current account.

Contribution Limit

Maximum of £50,000 total balance in Premium Bonds per person – you can put that all in at once, or over time. Any winnings that bring your balance above £50,000 will be paid to your current account.



UK Tax Treatment – Contributions

Contributions are from post-tax money, no tax benefits.

UK Tax Treatment – Withdrawals

UK tax free, even if you win £1 million. If you’re over the Personal Savings Allowance, this is an additional benefit, even with more typical £25 prizes.

US Tax Treatment – Contributions

Contributions are from post-tax money, no tax benefits.

US Tax Treatment – Withdrawals

Fully taxable like interest on a savings account. And since there’s no UK tax, there won’t be any Foreign Tax Credits to offset it (unless you happen to have other passive category tax credits, including carryover).

Further Reading

MoneySavingExpert on Premium Bonds

UK Innovative Finance ISA (Account Options)

I’ll be honest, this isn’t one I’ve done a huge amount of research on, because I don’t see a good case for using one. I’ve just covered the basics below, for completeness and awareness. If anybody has found a good use for an Innovative Finance ISA in the portfolio of Americans in the UK, I’d love to hear from you, maybe do a guest post or something.


ISA for peer-to-peer lending – UK tax free, US taxable. I’m expecting that the US reporting will also be a pain, because of the nature of peer-to-peer loans (lots of small loans, small amounts of interest, a fair number of them defaulting, etc.). It might also be a PFIC 😦

Unless you’re really keen on peer-to-peer lending, I see this as more headache than it’s worth, and I definitely recommend you research how you’ll have to report on your US taxes before your invest.


None, unless you’re really keen on peer-to-peer lending and want to use some of your £20k ISA allowance for it.


All UK residents age 18+

Investment Options

Peer-to-peer lending only.

Risk & Return

Your savings are not guaranteed, because the people you lend money to may not pay it back. Typically better interest rates than a cash ISA, to compensate for this risk, but that’s offset by the chance of not getting anything at all.

Withdrawal Options

From an account perspective, you can withdraw anytime. In practice, I have heard reports of it taking weeks or months to find a buyer for the loans that you hold, so quick access is not assured. There may also be an early withdrawal fee, depending on the terms of the account.

Contribution Limit

£20k per year per person – this is pooled among all ISAs. So if you contribute £4k to a Lifetime ISA and £10k to a Stocks & Shares ISA, you only have £6k left in the limit.

Unless your specific account is “flexible”, withdrawals in a year don’t reduce the amount towards the cap. For example, if you deposit £10k then withdraw £5k, you can only deposit £10k for the rest of the year, not £15k.


Fees are built into the interest rates.

UK Tax Treatment – Contributions

Contributions are from after-tax money, no tax impact.

UK Tax Treatment – Withdrawals

No UK tax on the interest, which is hopefully higher than in a savings account or Cash ISA (but at risk!). The same caveat around the Personal Savings Allowance applies as with a Cash ISA – most UK taxpayers don’t pay tax on interest anyway.

US Tax Treatment – Contributions

Contributions are from after-tax money, no tax impact.

US Tax Treatment – Interest & Withdrawals

The interest will be fully taxable in the US (potentially offset by other passive category Foreign Tax Credits).

The tax reporting seems like it would be complicated, due to multiple underlying loans, some getting defaulted on, etc. I’d love to hear from any US taxpayers who have filed with an Innovative Finance ISA, it might not be too bad.

I’ve seen some discussions that this could be a PFIC, which would almost certainly be more headache than it’s worth. I expect this depends on how the specific account is structured – if you’re buying a “loan fund” instead of individual loans, this could be true. Buyer beware!

Further Reading

MoneySavingExpert on Innovative Finance ISAs

UK Cash ISA (Account Options)

Now we’re getting to the accounts that aren’t part of the flowchart for a “typical” American in the UK planning for retirement, but they have their purposes and might be useful in your individual plan.


A Cash ISA is a glorified savings account that’s UK tax free, US taxable. Most people don’t pay UK tax on savings anyway, but if you exceed the Personal Savings Allowance, it might be useful for short term savings.


Not a priority for long term investments due to the low interest rates (about the same as a typical savings account, or often slightly worse). It could be good for a shorter term saving goal, like buying a house, a car, maybe saving for education, etc.


All UK residents age 16+

Investment Options

Cash only.

Risk & Return

Effectively risk free, with FSCS guaranteeing up to £85k in case the bank fails. If you’ve got more than £85k, you can have accounts at multiple banks, although you can only contribute to one Cash ISA per year (you could contribute to one in 2020, and then another in 2021, that’s fine).

Interest rates will vary with the interest rate environment, but typically similar or slightly worse than a non-ISA savings account.

Withdrawal Options

You can withdraw your contributions and interest at anytime, unless you select a “fix” account. This is basically the UK equivalent of a CD, where the interest rate is locked for the term of the “fix”, but there are penalties for accessing it early. Fix’s usually have slightly higher interest rates than “easy access”, to compensate for the money being locked away.

Contribution Limit

£20k per year per person – this is pooled among all ISAs. So if you contribute £4k to a Lifetime ISA and £10k to a Stocks & Shares ISA, you only have £6k left in the limit.

Unless your specific account is “flexible”, withdrawals in a year don’t reduce the amount towards the cap. For example, if you deposit £10k then withdraw £5k, you can only deposit £10k for the rest of the year, not £15k.


Typically none, except maybe an early withdrawal penalty for a fix.

UK Tax Treatment – Contributions

Contributions are from after-tax money, no tax impact.

UK Tax Treatment – Withdrawals

No UK tax on the interest, which is the advantage over a savings account. However, UK taxpayers have a Personal Savings Allowance of £1,000 if you’re a 20% basic rate taxpayer, £500 if you’re a 40% higher rate taxpayer, £0 if you’re a 45% additional rate taxpayer. As long as your total interest is below the PSA, you don’t pay tax anyway.

Therefore, unless your interest is above the PSA, there’s no reason to go for a cash ISA over a cash savings account. Note that the PSA also applies to foreign interest, like from any US savings accounts or CDs.

US Tax Treatment – Contributions

Contributions are from after-tax money, no tax impact.

US Tax Treatment – Interest

Interest is fully taxable in the US, like any savings account. The US doesn’t have an equivalent to the PSA. If you happen to have other passive category taxes* paid to the UK, you could use those to offset these US taxes.

*Not sure what passive category taxes are? US Foreign Tax Credits are split into different categories, passive category taxes cover taxes on things like interest, dividends, and capital gains. You can only offset taxes within a category – the UK taxes on your salary won’t help you here. I’m planning a longer post exploring the Foreign Tax Credit.

Further Reading

MoneySavingExpert on Cash ISAs

My Story

I don’t intend for this site to be primarily about me – I won’t be doing monthly net worth updates or anything like that (maybe an annual high-level look back at the year). But I thought it might be useful to give a little bit of my history, so you can get to know me and maybe help decide if I’m somebody you want to listen to on these topics.

I’m planning on staying semi-anonymous for the moment, so I’ve left out some identifying details. That’s a decision I’m open to revisiting, depending how things go.

Personal History

I grew up in the US, in a generally happy, comfortable, upper-middle-class childhood. My grandparents were all solidly working class, and I think their work ethic and frugality strongly influenced my parents and, through them, me. We didn’t want for anything, but lived below our means and without extravagance.

I went to university, paid for by the US Navy via ROTC. When I graduated in the middle of the financial crisis, it was very nice to have a job already lined up. The Navy was a great experience and taught me loads, both hard technical topics and softer leadership, communication, and self-discipline skills. I met my wife towards the end of my time in the Navy, which strongly influenced my decision to leave for a better work/life balance.

I moved into pharma/biotech after leaving the Navy – not an immediately obvious transition, but submarines and drug manufacturing actually have a lot in common. The skills I’d learned in school and the Navy, plus a strong work ethic, carried me upwards quickly, and I got a masters along the way.

Then the Brexit vote happened. My wife grew up in the UK but is an EU citizen. We knew that if we waited until after Brexit, our chance for her to move “home” would rapidly get more difficult. So we jumped through the immigration hoops and moved, with our 2-year-old and while my wife was pregnant with our second. Busy times, but a great adventure.

My career took a small step back when we moved, but I proved myself again and advanced a few times, bringing us to today. I wound up specializing in project management, and the level of planning and attention to detail I use at work is equally useful in planning for FIRE.

Financial History

Between the Navy paying for college and a modest inheritance, I was lucky to start my career near the bottom of the financial crisis with a little bit invested and only some small, low interest debt. When interest rates plummeted, I paid off the debt, and started to invest a bit. I learned about index investing, and moved from the high-fee actively managed funds that my broker had recommended into indexes.

I won’t pretend that I was especially financially responsible in the Navy – I was young and having a good time. But I set up automatic investments in my TSP (government 401(k)) and I reliably maxed out my Roth IRA every year. I didn’t have a long term plan, but I knew I should be saving something.

Shortly after leaving the Navy, I discovered FIRE, and realized that I was already on the right path, I just didn’t know it. I didn’t radically change anything, just some tweaks for efficiency and limiting lifestyle inflation as my career progressed. I’m very lucky that, while my wife isn’t that interested in finances, she’s naturally frugal, and we work well together. Combine our strong savings with a lucky break in a hot housing market, and we were in a good place when we moved to the UK.

This was a great case of early Financial Independence freeing us to do what we wanted to do. I took a significant pay cut when we moved, and housing in our part of the UK is a lot more expensive than it was in the US. But we had the savings to make it work, and the temporary reduction in our savings rate didn’t set us back too much.

Now, we’re pretty well settled in to life in the UK. Aside from some home improvements in the next few years, we don’t have any plans for big spending, and are safely in the “boring middle” of the accumulation phase. Retirement plans will evolve, but we’re mostly on track to retire when our younger daughter leaves for university (or whatever she might choose at that age).

We could probably push retirement forward some with more aggressive saving, but it feels like that will probably be the right time to make big life changes. It would be an early retirement, in my early 50s, but not as dramatic as other people retiring in their 30s. At this point, I’ve got a job I mostly enjoy, live in a nice area, and have a pretty good work/life balance, so I’m happy to live life as it is and stay on our current path.

The US/UK Tax Treaty

Big caveat up front: I am not a lawyer! This is 100% a layman’s reading of the tax treaty – it’s entirely up to you to confirm my interpretations. I’ve tried to call out situations where there are various interpretations so you can make your own judgment or seek out professional advice. Don’t try to rely on anything I say in court!

This post is meant to be a high-level overview of the US/UK tax treaty, especially as it applies to US citizens living in the UK. The treaty is 61 pages long, and the US Department of the Treasury explanatory notes on the treaty are another 131 pages.

I am not going to do justice to a document of that length and complexity in a single post! But what I do want to do is start getting you familiar with what the treaty is, and dive a little bit into the key parts that are relevant for us.

The US/UK Tax Treaty in 3 Bullets

There’s a lot of detail below – I encourage you to read it. But if you take away just 3 things about the US/UK Tax Treaty, I think they should be:

  1. The treaty protects you from double taxation – you should only ever pay the higher tax imposed by the US or UK, but not a higher plus another lower tax (you might pay the lower tax to one country and then the difference to the other)
  2. There are a number of mechanisms to protect pensions (including 401(k), IRA, etc.) – the tax treaty helps you to save for retirement. It’s other rules that make it difficult (PFIC, FATCA, MiFID/PRIIP, HMRC Reporting Funds, etc.).
  3. Just because the treaty says you can do something, doesn’t mean you have to or its a good idea – prime example is that you can exclude your UK pension contributions from your US income, but you probably shouldn’t.

What is the US/UK Tax Treaty?

Officially, the UK/USA Double Taxation Convention of 2001, it’s an international treaty between the governments of the United States and United Kingdom, aimed at avoiding double taxation and preventing tax evasion. It replaces an older agreement from 1975.

The full treaty text is available here. The technical explanation is very helpful in understanding the treaty, although it’s written by the US side and isn’t necessarily binding. HMRC also has a “Double Taxation Manual” that helps interpret from the UK side. I haven’t seen any big areas where the countries disagree, at least so far.

The rest of this post will go through the key parts of the treaty one by one. I’ve included the actual text of the treaty, and then some plain language commentary from me about what that part means to the typical American in the UK, informed by the technical explanation and the double taxation manual. Once you’ve looked through this overview, I’d encourage you to dig deeper on any parts that are particularly interesting or concerning to you!

The Savings Clause

Most US tax treaties include a clause to the effect that the US can tax its citizens however the US wants, regardless of where they live, and the other country can tax its residents however they want. In the US/UK tax treaty, that’s at Article 1, Paragraph 4:

4. Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.

Fortunately, paragraph 5 gives us some exemptions, where the treaty applies to US tax on US citizens, and to UK tax on UK residents:

5. The provisions of paragraph 4 of this Article shall not affect:

a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (N0n-discrimination), and 26 (Mutual Agreement Procedure) of this Convention;

b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.

Whew! That’s a lot of paragraphs, I know. In plain English:

  • 5a says that all the paragraphs listed there apply to US citizens whether they live in the US or UK, and to UK residents in the UK. We’ll go through each of those paragraphs in the rest of this post.
  • 5b says that those paragraphs don’t apply to people who are not citizens or permanent residents of the US or of the UK, depending which benefits you’re looking at. This mostly applies to people temporarily in a country as a student, teacher, government assignment, etc. Since this site is focused on Americans living in the UK permanently, or at least long term, I won’t go into this part in more detail in this post.

Article 9: Associated Enterprises

Paragraph 2

2. Where a Contracting State includes in the profits of an enterprise of that State, and taxes accordingly, profits on which an enterprise of the other Contracting State has been charged to tax in that other State, and the other Contracting State agrees that the profits so included are profits that would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those that would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be paid to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.

This paragraph applies to businesses, and their managers and directors, that manage a business in the other country. It doesn’t apply to most typical Americans in the UK, so I’ll skip it, aside from saying that if you’re running a business with elements in both the US and UK, you should probably talk to a professional

Article 17: Pensions, Social Security, Annuities, Alimony, and Child Support

Now we’re getting to parts that apply to more of the audience of this site. We’ll go through each paragraph that isn’t excluded by the Savings Clause one by one.

Sub-Paragraph b) of Paragraph 1

(b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

All the mentions of states and such gets confusing, so lets use clearer words typical of an American in the UK: You are a resident of the UK. Anything paid from a pension in the US that would be exempt from tax in the US if you were a resident of the US, is also exempt from tax in the UK.

For example, a distribution from a US 401(k) or IRA to a UK resident would be exempt from UK tax to the same extent it’s exempt from US tax if it was distributed to a US resident – for a Roth IRA, that’s tax-free, for a Traditional 401k, it’s taxable income.

This is potentially a very useful paragraph, because it means that even though the UK doesn’t have a direct equivalent to an IRA, you can still use your IRA and get both US and UK tax benefits on it. You can also hold on to any 401(k), 403(b), TSP, etc. that you have in the US and not be penalized when you withdraw from them in retirement.

Paragraph 3

3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State.

Another handy one – if you qualify for US Social Security, those payments can only be taxed by the UK, not by the US. Your Foreign Tax Credits might have taken care of any US tax anyway, but this provides further cover.

Note that this applies if you were to qualify for a UK State Pension and then move back to the US – the UK wouldn’t be able to tax you on your State Pension.

But it doesn’t apply for a UK State Pension if you stay in the UK. If you’re a US citizen living in the UK and receiving a UK State Pension, both the UK and US can tax the State Pension. In practice, you definitely won’t be double taxed, due to Foreign Tax Credits, and the same FTCs will probably wipe out any US tax at all, but it does add to the pain of your US tax return.

Paragraph 5

5. Periodic payments, made pursuant to a written separation agreement or decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contacting States, except that, if the payer is entitled to relief from tax for such payments in the first-mentioned State, such payments shall be taxable only in the other State.

Divorce is an area of tax I’m luckily not very familiar with, so I won’t comment on this in any detail except to say that if you’re paying alimony or child support and you live in one country while your former spouse lives in the other, this is worth looking into further.

Article 18: Pension Schemes

Here’s another important one for Americans in the UK who are saving for retirement – and the term “pension scheme” is broader than it might sound at first.

Paragraph 1

1. Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).

Plain English example: You are a resident of the UK. You have a pension (401(k), IRA, etc.) in the US. Income from that pension can only be taxed when it is paid to you, or for your benefit. It can’t be taxed just because you moved it to another pension (like rolling over a 401(k) to an IRA or changing IRA providers).

Converting Traditional to Roth IRAs is a little more complicated, I’ll write a dedicated post on that in the future because it’s potentially really helpful.

Paragraph 5

This is a long one, so I’ll break it down into sub-paragraphs:

Sub-Paragraph (a)

5 (a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the income of which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom,

(i) contributions paid by or on behalf of that individual to the pension scheme during that period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and

(ii) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States.

This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the United Kingdom.

Plain English example: You are a US citizen who lives in the UK and works for a UK employer. Your employer has a workplace pension scheme, which both you and the employer contribute to. Your contributions and your employer’s contributions to that pension aren’t taxable as income in the US.

On the face of it, this looks like a useful benefit – you don’t have to pay US income tax on your or your employer’s pension contributions! But wait, think about how this would work if you chose not to apply it (which you’re allowed to do):

  • You include both your contributions and your employer’s contributions to your pension in the income on your US tax return.
  • You’ve paid UK income tax on all your other income, at higher rates than the US (maybe 40% for income that’s only taxed at 12% in the US – simplified example, stay with me)
  • You get a Foreign Tax Credit for all the UK income tax you paid.
  • That FTC wipes out all your US income tax – you owe $0
  • As far as the IRS is concerned, you’ve now “paid” income tax on those pension contributions, so you’ll never get taxed again, like a Roth 401(k).

This is one that’s very situation dependent and will depend on your overall financial & tax picture, but the example above is fairly typical. If you did elect to exclude the pension contributions from your US income, you’d still owe $0 to the IRS, but when you go to withdraw those pension contributions and the growth on them, that would all be taxable income. Sure, maybe you wouldn’t owe US tax then either, again because of the Foreign Tax Credits, but situations change – it might be better to lock in the tax-free nature now.

  • Like everything in life, there’s no free lunch. The advantage to using the treaty and excluding the pension contributions is that you’ll have a larger Foreign Tax Credit to carryover to the next year, because you won’t use so much in offsetting your US tax. If you’re in the UK long term, you’ll probably have more FTC carryovers than you know what to do with, but this could be useful for some people or if you’re planning to move back to the US.
  • Also, if you do elect to exclude your pension contributions, you need to tell the IRS directly by filing Form 8833 with your US tax return.

OK, on to sub-paragraph (b)…

Sub-Paragraph (b)

(b) The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United States.

Plain English: you can’t get more benefit from a UK pension that you would from a similar US account, like a 401(k). That means you’re limited to the lower contribution limits of the US 401(k), at $19,500 for 2021 plus $6,500 catch-up contributions if over 50, and $58,000 combined employer and employee contributions, instead of £40,000 per year. The UK lifetime cap and taper still apply.

Some more obscure US limits can also come in to play for highly compensated individuals (that is, you own more than 5% of the business or made more than $130,000) – if you’re in that situation, you’ll want to do some more research.

Sub-Paragraph (c)

(c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a pension scheme established in the United States, contributions made to, or benefits accrued under, a pension scheme established in the United Kingdom shall be treated as contributions or benefits under a generally corresponding pension scheme established in the United States to the extent reliefs are available to the individual under this paragraph.

This paragraph mostly clarifies some of the limits above – the US will treat your UK pension contributions the way the US would treat 401(k) contributions, basically. There’s some nuance here, but that’s the gist of it.

Sub-Paragraph (d)

(d) This paragraph shall not apply unless the competent authority of the Untied States has agreed that the pension scheme generally corresponds to a pension scheme established in the United States.

This is a good point to jump to the “Exchange of Notes” that is attached after the end of the treaty, because it calls out which pension schemes “generally correspond”. They are the ones in the note to sub-paragraph o) of paragraph 1 of Article 3 (General Definitions):

(a) under the law of the United Kingdom, employment-related arrangements (other than a social security scheme) approved as retirement benefit schemes for the purposes of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and personal pension schemes approved under Chapter IV of Part XIV of that Act; and

(b) under the law of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans.

I wanted to save you the pain of reading the “Income and Corporation Taxes Act 1988” and trace through which schemes are covered. However, that act was repealed and replaced by the Finance Act 2004. The treaty benefits will go to the successor plans, but confirming exactly which products are approved under these chapters is best left to a lawyer. By my understanding:

  • Definitely included: workplace pensions, both defined benefit and defined contribution
  • Maybe included: SIPPs
  • Not included: ISAs

On the US side, it’s easier to trace these through, although still complicated. My list probably isn’t exhaustive, but includes:

  • 401(a): Governmental, educational, and non-profit plans, roughly similar to a 401(k)
    • The Thrift Savings Plan should fall under this too (it’s technically created by a separate piece of legislation, the Federal Employees Retirement System Act of 1986), but is treated as a trust under 401(a)). I have not come across any arguments that TSP isn’t a generally corresponding pension scheme.
  • 401(k)
  • IRAs: Traditional, Roth, SEP, and SIMPLE
  • Individual retirement annuities
  • 403(a): These are qualified annuity plans that are fairly rare now, but they’re covered
  • 403(b): Similar to a 401(k) but for schools and tax-exempt organization

If you have a different kind of “pension scheme” not mentioned above, I’d be interested to hear about it and see if we can confirm that we should add it to the list.

Article 24: Relief from Double Taxation

This is a long article, and a lot of it isn’t very relevant to typical Americans in the UK. The whole thing is specifically excluded from the Savings Clause, so it does apply to us, but I don’t happen to personally own an oil well 🙂

Some key takeaways:

  • The US and UK are both required to offer Foreign Tax Credits, to avoid double taxation.
  • There are some special rules specifically for US citizens in the UK but with US source income. This gets complicated, but the two key elements are:
    • No double taxation
    • The state of residence gets first dibs
  • If you own a company or trust, there’s lots in here for you – take a look, and get advice if you need it

Article 25: Non-discrimination

Another long article without a lot of specific relevance to most Americans in the UK. Key points:

  • The UK can’t tax US citizens who are resident in the UK any more severely than they tax UK citizens resident in the UK. Same with the US taxing UK citizens resident in the US.
  • However, taxes can be different without being more burdensome – and we all know they are different!
  • The same applies to deductions – they can’t be any worse, but they can be different

Article 26: Mutual Agreement Procedure

This one is basically a mechanism for resolving issues and problems related to the treaty. It’s probably nothing you’ll ever need to worry about, but it’s there if you need it.

US & UK Taxable Brokerage (Account Options)

I’ve lumped US and UK taxable brokerage accounts together because they’re conceptually very similar. There are slightly different challenges, based on the available investments, but I’ll call out where they differ. For most Americans in the UK, you’re best off with a US account, if you can get somebody to let you have one!


There are no tax advantages in either the US or UK, and no limits on contributions. If you use index funds, you need to make sure they aren’t a PFIC to the US and are HMRC reporting to the UK. Jumping through both of those hoops can be difficult – the other option is individual stocks.


Taxable brokerage accounts are the last “general purpose” account for most people. Once you’ve filled up your fully or partially tax advantaged accounts (pension, IRA, ISA), this is pretty much what’s leftover.

The US brokerage is, to me, a higher priority than a US one just because it’s easier to do index investing, as long as you can use a US address for it. If you don’t have or want to use a US address, even if you can get a US broker to open you an account, buying index funds will likely be a challenge due to UK/EU regulations. In that case, you may wind up stuck with individual stocks – whether you want to hold those in a US or UK brokerage is mostly up to you.


Pretty much anybody, but you may find it challenging to find US brokerages that want to deal with Americans abroad (especially in the UK/EU) and to find UK brokerages that want to deal with US citizens. I’d like to put a good list together – very much open to suggestions!

Suggestions I’ve heard previously are Charles Schwab and Interactive Brokers for the US, with Hargreaves Lansdown for the UK, but there probably more options out there.

Investment Options

You’re able to buy anything you like, but you want to keep PFIC and HMRC reporting in mind. As a quick summary:

  • PFIC: You don’t want mutual funds or ETFs that are located outside the US. Non-US individual stocks and bonds are fine.
  • HMRC reporting: You want mutual funds/ETFs that do report to the HMRC and are on their list. Or you want individual stocks and bonds.

Risk & Return

Totally depends on what you invest in. If you limit it to index funds vs individual stocks, you’ll have more risk in individual funds. Either way, though, nothing is guaranteed and you could lose money.

Withdrawal Options

Withdraw contributions and earnings at any time with no penalty. However, selling investments that have appreciated results in a capital gain, which is potentially taxable in both the US and UK (although you shouldn’t be double taxed – more details below).

Contribution Limit

None – invest as much as you want or have.


Depends massively on the broker. In the UK, they tend to charge both a platform fee and a dealing (transaction fee), while the US is more on transaction fees (and some transactions may be free, like buying funds from the same brokerage you have your account with). On the whole, US fees tend to be lower, but it varies.

UK Tax Treatment – Contributions

All contributions are from post-tax money, no tax impact.

UK Tax Treatment – Withdrawals

Any capital gains are taxable, although the UK has a relatively generous capital gains allowance of £12,300 per year – stay under this allowance, and there’s no UK capital gains tax.

You can also be taxed on any dividends or interest when they’re paid, not just when you take them out of the account. These also have UK allowances: the Personal Savings Allowance for interest (ranges from £1,000 for a basic rate taxpayer, £500 for a higher rate, and £0 for an additional rate) and the dividend allowance of £2,000.

If you make a loss, you can also use that to offset gains – gets complicated, I’ll explore it more in a future post because it can be useful, even selling at a loss on purpose, called “tax loss harvesting.” For now, just be aware it’s a possibility.

US Tax Treatment – Contributions.

All contributions are from post-tax money, no tax impact.

US Tax Treatment – Withdrawals

Similar to the UK, capital gains, dividends, and interest are all taxable. In general, for most Americans in the UK, the UK will get first dibs on these, and then you can take a credit against your US taxes for any taxes you pay to the UK. But because all of these have some UK allowances, it’s possible to not owe any UK tax but wind up owing US tax.

The US doesn’t have any similar allowances for capital gains, dividends, or interest. There are two caveats that can reduce your tax – these get a bit complicated, but at a very high level:

  • Long vs short term capital gains: hold your investments for more than a year and your gains get taxed at the lower capital gains rate. Held for less than a year, they get taxed at your higher marginal income rate.
  • Ordinary vs qualified dividends: hold your investments for 2 months before and 2 months after the dividend is paid, and they get treated at the same rate as long term capital gains (qualified dividends). If not, these ordinary dividends get taxed at your higher marginal income rate.
    • Dividends from PFICs can’t be qualified!

Buy and hold! It saves you money on taxes and on transaction fees, and keeps you from making silly decisions 🙂

Tax loss harvesting is possible for the US as well – more to come in a future post.

S&S ISA Experiment – Getting Started

One of the triggers that got me started with this site was my recent experience of opening a Stocks & Shares ISA. I’d like to share my experience so far with all of you, in the hopes it might help if you’re in a similar situations. I’ll also post periodic updates, to see how this experiment works over the next year or so.

Why a S&S ISA?

Due to a series of fortunate events, I have a little extra monthly income that’s looking for a home. I’ve already fully matched my employer’s contributions into my workplace pension, and I don’t want to lock more money away until I’m 55 or 57 (setting aside the questions of a foreign grantor trust, but that’s another small part of it). I’ve also fully contributed to Roth IRAs for myself and my wife – thanks COVID stimulus!

So, using The Flowchart, I’m at the box asking “Are you comfortable with individual stocks?”

To be perfectly honest, I’m not 100% sure what my answer to that question is, but I’m going to have a go! I’m still a big believer in passive investing and I’m not looking to go into serious stock picking, much less day trading, but the US tax system has pushed me to try out individual stocks so I can avoid the punitive PFIC regime.

Where to open my ISA?

There are loads of brokers in the UK that offer S&S ISAs – Monevator has a great comparison list here. Unfortunately, most of those brokers don’t want to work with US citizens (thanks FATCA!). Eventually, I’d like to put together a definitive list of brokers that will work with Americans, but for the moment, this Reddit post has a good starting list.

I went with Hargreaves Lansdown, for three reasons:

  • They’ll happily work with Americans
  • They’re an established company with a good track record – I’m not worried about them disappearing in the night, and trust they will be around for a while.
  • Their fees are competitive – not the lowest out there, but not too bad:
    • 0.45% annual platform fee – for holding shares, this is capped at £45, so if your ISA grows larger than £10,000, the fee doesn’t go up any more.
    • £11.95 dealing fee (buying or selling of shares). This adds up quick, but I’m not planning on trading much. Also, if you set up automated monthly investments, this fee drops to £1.50.

Actually opening the account was easy – all online, and nothing extra complicated due to being a US citizen except needing to provide my US passport number. My account was open within a few minutes and the initial contribution went through my Nationwide debit card without any issues. Next step – picking the stocks to invest in.

Wait, why can’t I use index funds?

I’ll write a longer post going into the details of what a PFIC is and ways of dealing with this onerous US restriction. In the meantime, the Bogleheads wiki has a great explainer.

Very short version:

  • Unit trusts (mutual funds in American) and ETFs are almost all PFICs.
  • PFICs require the submission of an extra form on your US tax return, Form 8621. You need to do a copy of this form for each investment.
  • There are a few options for how to report the PFIC gains/losses – even the least punitive (mark to market) is still painful, because you have to pay taxes on any gains every year, even if you don’t sell the investment.
  • So the best option for most people will just be to avoid PFICs entirely.

Picking stocks for my ISA

Even though the US tax system has pushed me into individual stocks, I’m still a believer in passive investing generally. So I’m creating a “pseduo-index” or a “brew your own index fund” – trying to mimic the performance of an index using individual stocks.

Trying to actually own all the funds in an index would be hugely expensive due to the dealing fees – even at the lower £1.50 for an automatic investment, buying the whole FTSE 100 would cost £150, plus any additional investments later. That’s more than I wanted to spend on fees, plus owning 100 stocks makes for more bookkeeping headaches and more reporting on my US taxes.

So I decided to pick 20 of the largest stocks in the FTSE 100. Why the FTSE 100? Hargreaves Lansdown charges an extra 1.5% on foreign currency transactions, so I wanted to stick to stocks traded on the London stock exchange. I have a target of 10% UK stocks in my asset allocation anyway (future post to come on asset allocation more generally), so this counts against that.

Why 20 stocks? I did some crude backtesting against the overall FTSE 100, and found that 20 stocks felt like the sweet spot where it’s not so many stocks that it’s painful and expensive to manage, but not so few that the performance of any one stock will have a huge impact on the overall performance. This is not especially scientific – it just feels right to me.

So I got the list of all the FTSE 100 constituents, and started going down the list from biggest to smallest to pick the first 20. But as I looked, I realized some of these weren’t companies that I was particularly interested in over-investing in. These fell into two categories:

  • Companies that made me feel a little icky. Many of these are materials companies with questionable human rights records and a long colonial history of exploitation, or banks that facilitate money laundering and other criminal activities. I also ruled out tobacco companies, but not alcohol – you may have different ideas about what makes a company “icky”, and that’s fine!
  • Sectors that really don’t feel like a good investment in the current environment – for example, with interest rates so close to zero at the moment, I don’t see the environment for banks improving any time soon.

Both of these judgments are against the idea of index investing! But, this is an experiment, and it’s my money, so I’m going to try it my way. Worst case, this ISA will probably be less than 3% of my investments by the end of 2021, and even if one of these companies goes to zero, it’s a minor hiccup on my way to FIRE.

  • It’s worth mentioning that I do still own some of these stocks through index funds in other accounts. I’m not going out of my way to complete divest from them, I’m just choosing not to over-invest in these particular companies.

I also decided to equally weight each of the 20 stocks, instead of market weighting. Why? Because it’s simpler and easier to manage. To rebalance, I just add money to whichever stock has the lowest value, no complicated math involved.

Which stocks did I pick?

Here’s the list of FTSE 100 stocks, from biggest to smallest, with either my decision to invest, or a quick reason why I didn’t. I stopped once I got to 20 “yes” votes.

HSBCHSBANo – both a “slimy” bank, and a bank that I see struggling with low interest rates
Rio TintoRIONo – exploitative history, environmentally problematic
British American TobaccoBATSNo – tobacco
Royal Dutch SchellRDSA/ RDSBNo – exploitative history, and I thought one mostly oil company was enough with BP
Reckitt BenckiserRBYes
BHPBHPNo – exploitative history, environmentally problematic
PrudentialPRUNo – when I did the whole list, having two insurance companies seemed like more than enough, and Aviva seems more likely to succeed to me. But that’s just a guess.
Anglo AmericanAALNo – exploitative history, environmentally problematic
GlencoreGLENNo – exploitative history, environmentally problematic
London Stock Exchange GroupLSEGYes
BarclaysBARCNo – I see banks struggling for a while to come
National GridNGNo – two utility companies seemed excessive, and SSE seems like a better longer term bet with their focus on renewables
FlutterFLTRNo – the way gambling works in the UK seems icky, and online gambling commercials drive me crazy
LloydsLLOYNo – I see banks struggling for a while to come
NatWestNWGNo – I see banks struggling for a while to come
FergusonFERGNo – overlap with CRH and Ashtead on the construction market, one seems like enough
AshteadAHTNo – overlap with CRH and Ferguson on the construction market, one seems like enough
Associated British FoodsABFYes
AntofagastaANTONo – exploitative materials
Legal & GeneralLGENNo – one insurer felt like enough, and L&G always comes across as a bit scammy to me (totally subjective!)
Scottish MortgageSMTNo – PFIC in disguise! UK investment trusts look like stocks, but they’re actually PFICs.
BAE SystemsBAYes
Standard CharteredSTANNo – I see banks struggling for a while to come
Skipped a fewlineshere, because I wanted the ones below
International Consolidated Airlines IAGYes – wanted an airline, because I think they may come back from COVID faster than expected (but that’s just my guess!)
Intercontinental HotelsIHGYes – wanted a hotel chain, because I also think they will come back faster than expected. IHG also has a somewhat COVID-resilient business model (they don’t own most of the hotels).

I did do a comparison of this portfolio against the overall market weighting of the FTSE 100 – it’s not all that out of whack, even with those very subjective decisions above (numbers as of Feb 2021, although I don’t expect them to change too fast):

SectorFTSE 100 WeightingMy Weighting
Consumer Staples20%24%
Health Care11%6%
Consumer Discretionary10%18%
Real Estate2%0%

Getting Started

Once I picked how I wanted to invest, getting started was pretty easy. I had funded the account initially with a few hundred pounds, which I invested into the top two companies. Then I set up a recurring plan to invest in the rest – I’ll do a large first month, because my annual bonus got paid in March, and then a few hundred pounds each month into whichever stock (or maybe 2 or 3) has the smallest value, with an aim to keep them all roughly equal.

I don’t plan on rebalancing through any sales, and I’m hoping I don’t need the money anytime soon. If I do, though, the flexibility of an ISA means I can take a withdrawal at any time and just pay the transaction fee and any US capital gains taxes.

Future Updates

There are a few things I’d like to explore some more over time, and will go into in future posts:

  • Tracking my ISA vs an index fund: how am I doing? Better, worse, about the same?
  • US taxes: since I started the ISA in early 2021, I won’t need to report anything until I do my 2021 US taxes, about this time next year. I’ll look at what records need to be kept, how the ISA gets reported on my taxes, and any pitfalls to avoid.

Is there anything else you’d like to know about a S&S ISA? Let me know in the comments!