aaaxl wrote: Sun Sep 28, 2025 1:14 pm
Background:My wife and I are UK residents. I am a US citizen. My wife recently she gave up her green card, so she is not a US Person anymore.
We don’t know if we will stay in the UK permanently, or if we’ll move back to the US at some point. Let’s assume each one is a 50% chance.
Because we are/were US Persons, we have always held our assets in US-based (but HMRC-reporting) ETFs, mostly in non-retirement accounts. These are all dollar-denominated. But now that my wife can efficiently hold UK-based investments, we can consider other options.
We own our home (in the UK), are in our late 40s, no kids, no plans to retire soon. We are both earning in GBP. We have enough in our in our investments to comfortably retire on. So we don’t have any immediate need for this money.
I’m targeting a conservative asset allocation of 55% stocks.
My questions:
(1) How important is it for our bond portion to be partially GBP-hedged?
Since we don’t know where we’ll end up, I assume the two options would be:
A) all USD
B) half USD, half GBP
In our situation, is B clearly better?
Yes. But see below. You should basically organise things as much as possible to minimise tax problems.
If you own property in the UK, and you have eligibility for UK state pension, then that gives you quite a bit of GBP-exposure. You might want more, but it’s worth bearing that in mind.
(2) Should we invest in inflation-linked gilts?Because we are UK-based and most of our wealth is in non-retirement accounts, it’s been hard for us to gain exposure to TIPS. I have some VTIP but it’s only about 17% of our bond allocation.
You have to consider your financial position carefully and see where TIPS are best held.
But now my wife can invest in EU-based TIPS ETFs, or gilts. This seems OK, right? I’m not sure I have much of a question here, just looking for validation.Thanks!
If your spouse holds the Index Linked gilts directly in a taxable account, as gilts not ETFs or funds, then the principal accretion due to inflation is not taxable. You only pay tax on the coupon.
Monevator.com takes you through this. It’s worth a read. And possibly checking with your tax accountant.
Of course, the Chancellor could change this. But it would risk disrupting UK govt bond markets (discounts on conventional gilts are not taxable, either, but that will only be the difference between the price you buy them at and £100 redemption value).
Note other inflation linked bonds (other governments, corporates) don’t have this exemption. Only ILGs (and conventional gilts). Only directly held.
Then you have to have a broker that lets you deal in them. Not all do. Then you have to pick ones.
FWIW I bought a very low coupon 20 year ILG. Which means I will have significant interest rate volatility (they dropped something like 30% in 2022, I believe). So I am taking a risk – long dated ILGs have a *lot* of interest rate volatility (and started 2021ish at a negative real yield, hence the extreme drop when interest rates started to rise in 2022 and then we had the ill-fated Truss/ Kwartung regime, all 44 days of it until the bond market threw a tantrum)*. Particularly the low coupon ones which trade at substantial discounts (so greater tax benefits if held to maturity). And of course I am also basically saying I, or my spouse, will be around in 20 years and know what to do with them. They are fungible ie I don’t have to sell them all in one go.
My rationale was the real yield is higher (around 2%) for the 20 year ones whereas shorter dated ones are much less (the Financial Times at the weekend has the average yield for different parts of the ILG index).
If you are the sort of (fairly sad) person like me who enjoys learning how to buy new financial instruments then there’s that bonus too – a learning exercise
Otherwise you can simply buy an ETF or fund, inside an ISA or SIPP (or employer DC pension).
ISAs
There are posts here by US citizens living in UK (tubaleiter?) who manage to construct ISAs which do not trigger horrible PFIC rules. Berkshire Hathaway is certainly quite a good way of building a portfolio -as a broadly based US conglomerate that won’t trigger PFIC rules). So you *could* hold an ISA if you are prepared to restrict yourself in that way. Managing a portfolio of say 10-20 stocks is a pain, but it’s not an impossible pain. Indeed Ted Swippet here asked AI to construct a portfolio on that basis, and then we batted it back and forth.
(My main point would be that the “tracker” portfolio would have all the Mag 7 tech stocks. And I think that’s too much. I’d rather be at most half weight — MSFT and 1-2 others. But with a healthy dose of consumer stocks (P&G, Nestle, Costco, etc), pharma (it’s very stock-specific so to hold a number of them) and mining (the US market is heavily weighted to tech, and underweighted to Materials and Industrials. The big mining cos (BHP, Rio Tinto, Glencore, possibly Freeport-McMoran) are my way of playing the energy transition (copper!), emerging market economic growth (iron ore and just about everything else) and to some extent hedging commodity inflation).
And certainly your spouse should have an ISA**. Vanguard does not have the lowest fees, but by restricting what you can buy to their funds (in my case the global equity fund) it helps behaviourally (for me) — a bit like Odysseus having his crew tie him to the mast so the calls of the Sirens don’t lure him onto the rocks. But it depends upon your overall portfolio strategy.
You will have seen my “Indefinite Leave to Remain” post? The time to start thinking about this (for you) is now, not at the next election. As we learned with Brexit, just because you are married to a British citizen doesn’t mean you cannot get slung out of the country (although to do that to US citizens would seem well – stupid).
* how bad could it get? Well, ILGs have yielded 4% real (back in the 80s/ 90s I believe). So that’s quite a long way down from 2% (roughly speaking, another 30% down or so on the index, if we take the (change in real interest rates) * duration of the ILG index (about 15 years from memory). The ILG index in the UK is very long duration — the UK govt bond market (nominal gilts as well) has the longest duration (greatest sensitivity to interest rate changes) of any govt bond market. There are political scenarios you could construct (say PM Corbyn on the left, or PM… on the right, as heads of unstable coalition governments) that would pound the UK govt bond market.
So. I could take a lot of pain. *But* I know that my principal is inflation-protected if I hold to maturity. Touch wood either I will still be alive, or at least my spouse will. And the income it throws off will be indexed to inflation (a low coupon, but one that is uprated with inflation).
If this all feels too much like hard work/ complexity, then hold an ILG fund *or* a mix of an ILG fund and a short term ILG fund/ ETF (there are a few). The strategy being to take the very long duration of the ILG fund (say 15 years) and the short term (up to 5 year) ILG fund (say 3-4 years) and get a weighted average somewhere in between.
** other than a UK DC pension or SIPP, ISAs. In fact after getting the employer match on pension contributions, I’d make sure your spouse’s ISA allowance was fully utilised. *However* if returning to the USA is possible, that would suggest using maximum pension allowances *first* because that is basically tax free from perspective of US authorities.
