Introduction: Wealth Management Fees Are Now Paid From Taxed Income in Both Countries
Wealth management fees are among the largest recurring costs a wealthy American in Britain pays, and in 2026 almost none of that cost reduces tax in either country. Congress removed the US deduction in 2018. Furthermore, the One Big Beautiful Bill Act made that removal permanent in July 2025. Britain never gave an individual investor a deduction against income in the first place. Therefore, a fee of 1% on a £5 million portfolio now comes entirely out of income that both countries have already taxed.
However, the picture is not uniform. Some wealth management fees still reduce tax, because of how they are charged rather than what they pay for. A dealing commission enters your cost basis in both countries. A fee collected inside a pension is paid from untaxed money. In contrast, the common flat percentage fee on a segregated portfolio gets nothing, and it carries 20% VAT on top.
This guide sets out the 2026 rules on both sides, the routes that still work, and the traps that are particular to US citizens. Additionally, it includes a case study with real numbers. TaxYork prepares the US and UK returns on which these costs either appear or do not, so the focus is the forms.
What Wealth Management Fees Cover and Why the Label Matters
Wealth management fees in plain terms
Wealth management fees are the charges a private bank, discretionary manager or financial planner makes for looking after your investments. In Britain, they usually come as an annual percentage of the assets under management, deducted quarterly from the portfolio. A typical London mandate costs between 0.6% and 1.25% a year, and MoneyHelper's guide to choosing a financial adviser describes the common charging models. Consequently, a £5 million portfolio can cost £30,000 to £62,500 before VAT.
That single figure often bundles four different services. Specifically, it pays for investment decisions, for custody, for dealing and for financial planning. Importantly, tax law in both countries treats each of those differently. Therefore, the way your manager labels and invoices the charge decides the tax result far more than the total does.
Four kinds of charge inside one invoice
The first is the ongoing management fee, charged for monitoring and running the portfolio. Secondly, there is the transaction charge, levied each time the manager buys or sells a holding. Thirdly, there is the cost inside any fund you hold, which the fund deducts before it pays you anything. Finally, some mandates carry a performance fee linked to returns.
As a rule, costs tied to a specific purchase or sale reduce a capital gain. Similarly, costs taken inside a fund reduce the income you receive. However, the ongoing fee charged directly to you is a personal expense in both systems. Most wealth management fees for London clients fall into that last category.
Why Americans in Britain feel it most
For example, a UK investor can soften the problem by holding funds, where the costs are netted off invisibly. However, an American cannot do that so easily. Most UK and European funds are passive foreign investment companies for US tax purposes, with punitive results. As a result, a compliant portfolio for an American usually holds shares and bonds directly, as we explain in our guide to a discretionary managed portfolio for US taxpayers. Consequently, that structure pushes the whole cost into the one category that neither country relieves.
How the IRS Treats Wealth Management Fees in 2026
The permanent end of the section 212 deduction
Before 2018, wealth management fees were deductible under section 212 of the Internal Revenue Code, which covers expenses for the production of income. Specifically, they were miscellaneous itemised deductions, allowed above 2% of adjusted gross income. Subsequently, the Tax Cuts and Jobs Act suspended that whole category for 2018 to 2025. Many investors expected it to return this year.
It did not. The 2025 legislation struck the end date, so section 67 now disallows miscellaneous itemised deductions for every year after 2017. The rule sits in what is now section 67(h). Accordingly, for the 2026 tax year and beyond, an individual cannot deduct investment management fees, financial planning fees or the cost of investment publications. The IRS explains the scope in Publication 529. Similarly, tax return preparation fees for a personal return fell away in the same way.
Why the net investment income tax gives no relief either
Many clients assume the 3.8% surtax at least allows the cost. It does not. The net investment income tax is charged on investment income less properly allocable deductions. However, Treasury Regulation 1.1411-4 allows an investment expense only to the extent it is deductible for regular tax after section 67 applies. Since nothing survives section 67, nothing reduces the surtax.
Notably, that matters more to an American in Britain than to one at home. No foreign tax credit offsets the surtax, so it is often the only US tax a London investor actually pays. Therefore, wealth management fees leave the 3.8% charge untouched on the gross income. We cover the surtax in detail in our guide to the net investment income tax for dual filers.
You cannot capitalise the fee into basis
Alternatively, a natural next thought is to add the fee to the cost of the investments. The IRS has rejected that. Section 266 lets a taxpayer elect to capitalise certain carrying charges. Nevertheless, IRS Chief Counsel concluded in 2007 that a flat advisory fee is not a carrying charge, because it pays for management rather than for acquiring or holding a particular asset. Consequently, an asset-based fee is neither deductible nor part of basis.
What still works on a US return
Three items remain. First, a commission or dealing charge on a specific trade adjusts basis on purchase and reduces proceeds on sale. The IRS confirms that treatment in Publication 550. Secondly, investment interest stays deductible under section 163(d), up to your net investment income, on Form 4952. Thirdly, the expenses of a publicly offered US fund are netted inside the fund, so you are taxed only on what it distributes.
Additionally, fees that relate to a trade or business are deductible under section 162. Advice on a business sale, a company pension scheme or partnership capital is a business cost if the business properly bears it. In contrast, advice on your personal portfolio is not, whoever pays the invoice.
How HMRC Treats Wealth Management Fees
No deduction against income
Meanwhile, Britain taxes an individual's dividends and interest on the full amount arising. No general rule allows the costs of earning investment income. Therefore, wealth management fees do not reduce the income on which you pay tax on dividends at 39.35% or savings income at 45%. In contrast, the position differs for a landlord or a trader, who deducts the costs of the business. An investor is neither.
The narrow capital gains rule in section 38
However, capital gains tax offers a little more. Section 38 of the Taxation of Chargeable Gains Act 1992 allows the incidental costs of acquiring and disposing of an asset. HMRC states in its Capital Gains Manual at CG15250 that the list is exhaustive. Specifically, it covers fees or commission for an agent or legal adviser, the costs of transfer including stamp duty, and valuation costs needed for the computation.
HMRC then draws the line that matters. CG15280 says adviser fees are deductible only to the extent they are directly referable to acquiring or disposing of a particular investment. Fees for advice on markets, or for the management of a portfolio, are not allowable. Likewise, an accountant's fee for computing the tax is excluded. As a result, the annual percentage charge fails, while the per-trade commission and stamp duty succeed.
VAT adds 20% to the wrong part of the bill
VAT then widens the gap. HMRC's VAT Finance Manual at VATFIN5800 treats discretionary portfolio management for an individual as a taxable supply at the standard rate. Furthermore, the Court of Justice confirmed that analysis in the Deutsche Bank case in 2012. Consequently, a £50,000 fee becomes £60,000, and a private individual cannot recover the VAT.
Nevertheless, two exceptions point in the same direction as the direct tax rules. First, the management of a qualifying investment fund is exempt, so costs inside a fund carry no VAT. Furthermore, a dealing commission can be exempt where the manager sets it strictly trade by trade and shows it separately. Where one fee covers both management and dealing, however, the whole charge is standard-rated.
Rebates and loyalty payments
One further UK point catches Americans out. Since April 2013, HMRC has treated cash rebates of fund or platform charges paid to an investor as taxable annual payments, usually with 20% deducted at source. Therefore, a rebate of wealth management fees is income on your UK return. Additionally, it needs a line on your US return, with the UK tax claimed as a credit.
The Routes That Still Reduce Tax on Wealth Management Fees
Dealing commissions in both countries
The only cost that both countries recognise is the transaction charge. The IRS adds it to basis. HMRC allows it under section 38. Moreover, it can be VAT-exempt. Therefore, a mandate with a lower management fee and explicit per-trade commissions is more tax-efficient than an all-inclusive fee of the same total.
However, the benefit is real but deferred. It arrives only when you sell, and it is worth the capital gains rate, not the income rate. For 2026/27, UK capital gains tax is 24% for a higher earner. Nevertheless, on £10,000 of annual dealing costs, that is £2,400 of UK tax saved that an inclusive fee would lose.
Fees collected inside a pension
The second route is location. Where part of your mandate sits inside a UK registered pension, the manager can take the fee for that part from the pension itself. HMRC treats proper charges for managing scheme assets as scheme administration payments. Consequently, that slice of your wealth management fees is paid from money that has never been taxed.
For an American, moreover, the treaty position matters here. The US-UK treaty generally defers US tax on growth inside a UK pension scheme. Therefore, a fee taken inside the pension reduces a balance the IRS is not currently taxing. Importantly, the pension must pay only for the management of its own assets. It cannot pay the fee on your taxable portfolio, and an attempt to make it do so risks an unauthorised payment charge.
Costs netted inside a fund, and the PFIC price
The third route is the fund wrapper, and for Americans it usually costs more than it saves. A fund deducts its management charge before distributing income, so the cost is relieved at your top rate and bears no VAT. That is why UK advisers favour funds. However, a non-US fund is generally a passive foreign investment company. Specifically, the default regime taxes gains at the highest ordinary rate with an interest charge, and each holding needs its own Form 8621.
US-domiciled funds avoid that problem, yet UK rules restrict their sale to retail clients, as we set out in our guide to US ETFs for Americans in Britain. Additionally, they raise UK reporting fund questions. In short, the wrapper that makes wealth management fees efficient for a British investor is the one an American can rarely use.
Fund partnerships, carry and the family office
Wealthier clients meet the same issue inside private funds. A partnership that is an investor, rather than a trader, passes its management fee to US individual partners as a non-deductible expense. As a result, you are then taxed on your gross share of income. In contrast, a carried interest or priority profit share is an allocation of profit to the manager. It never reaches your return, so it is relieved in full. Many UK funds pay the manager in that form, which helps, although the US analysis follows the substance.
At the top end, the Tax Court held in Lender Management v. Commissioner in 2017 that a family office managing money for wider family members, for a share of profit, was carrying on a business. Therefore, its costs were deductible under section 162. The facts were unusual, and the IRS scrutinises imitations. Nevertheless, it shows that structure, not size, decides the outcome.
Wealth Management Fees, Foreign Tax Credits and Reporting
Gross income, mismatched credits
Because wealth management fees are disallowed, your US return shows gross investment income. Meanwhile, Britain taxes the same gross income, and usually at a higher rate. Therefore, the foreign tax credit on Form 1116 often removes the regular US tax on UK dividends and interest. However, the fee changes neither side of that sum. What remains is the surtax, reported on Form 8960, on income you never kept.
One helpful consequence follows. A non-deductible expense is not allocated against foreign-source income, so it does not shrink your credit limitation. Our tax treaty optimisation service deals with the limitation in full.
Common errors on past returns
Wealth management fees produce a steady stream of return errors. Some preparers kept deducting them on Schedule A after 2017. Similarly, others subtracted the fee from dividend income, or from the gain on each sale. On the UK side, the annual fee is often claimed as a capital gains cost. Consequently, each of those understates tax.
The opposite error is equally common. Dealing commissions and stamp duty are left out of basis, because the UK tax pack reports gains differently. Furthermore, fee rebates and the 20% tax withheld on them go unreported. Where the errors run for several years alongside a missed FBAR or other missed reporting, a coordinated correction of both countries' returns is the efficient fix.
FBAR and Form 8938 values
Fees do not reduce the figures on your foreign account reports. The FBAR asks for the highest value of each account during the year, as FinCEN's reporting guidance explains. For example, a fee deducted in December does not lower a peak reached in June. Similarly, Form 8938 uses the maximum value. Our FBAR and FATCA reporting service reconciles those values to the manager's statements.
Illustrative Case Study: A £6 Million Mandate and a £61,200 Bill
The facts
Rebecca is an American partner at a London investment firm. She pays UK tax at the additional rate. Her discretionary manager runs £6 million for her, of which £1.5 million sits in her UK pension and £4.5 million in a taxable account of directly held shares. Meanwhile, the manager charges 0.85% a year on everything, inclusive of dealing, and bills the whole fee to the taxable account. That is £51,000, plus VAT of £10,200, or £61,200 in total.
The taxable account yields 2.5%, which is £112,500 of dividends. UK tax at 39.35% takes £44,269, ignoring the small dividend allowance. On her US return, credits cover the regular tax, but the 3.8% surtax applies to the gross dividends. At $1.27, that is $142,875 of income and $5,429 of surtax.
What the fee really costs
However, neither country allows any part of the £61,200. Rebecca keeps £68,231 of her dividends after UK tax, and about £63,956 after the US surtax. Her wealth management fees therefore absorb almost all of the net income her taxable portfolio produces. To fund the bill from dividends alone, she would need gross dividends of roughly £100,900, before the surtax.
Her previous preparer had also deducted the fee against her gains on the UK return and on Schedule A of the US return. Both claims were wrong, and both needed amending.
The restructured mandate
Three changes followed, none of which altered her investments. First, the manager began collecting the pension's share of the fee from the pension. That moved £12,750 plus £2,550 of VAT out of taxed income. Secondly, the taxable mandate moved to a 0.60% management fee with explicit commissions set trade by trade. The management fee is now £27,000 plus £5,400 of VAT. The commissions run at about £9,000 a year, carry no VAT and enter basis in both countries.
Her personal outlay from taxed income falls from £61,200 to £41,400. Of that, £9,000 will reduce future gains, which is worth £2,160 at the 24% UK rate. Additionally, the amended returns removed the wrong deductions before either authority raised them. The total paid to the manager barely moved. Nevertheless, the tax result changed considerably.
Practical Steps Before You Agree or Renew a Mandate
Ask for the invoice to be split
Start with the paperwork. First, confirm on the FCA Register that the firm is authorised. Then ask your manager to separate the management fee, custody, dealing commissions and any planning fee on every invoice. Otherwise, a single blended figure cannot be analysed afterwards. Moreover, HMRC's VAT treatment depends on commissions being set trade by trade and shown separately.
Match each fee to the pocket that should pay it
Next, check which account bears each charge. The pension should pay for the pension. A business should pay only for advice that is truly about the business. Otherwise, everything else falls on you personally. Importantly, do not let convenience decide. Billing every charge to the taxable account is simple for the manager and costly for you.
Give your preparer the right records
Finally, send your preparer the transaction history, not just the annual tax pack. Specifically, a UK pack reports gains under UK matching rules and in sterling. Your US return needs dollar basis for each lot, including commissions and stamp duty. Without that detail, the one cost you can still claim is lost.
How TaxYork Can Help
TaxYork prepares US and UK tax returns for Americans in Britain with substantial portfolios. We work from the manager's transaction records, so commissions and transfer costs reach basis on both returns. Furthermore, we check that wealth management fees have not been deducted where the law no longer allows them, and we correct earlier years where they were.
We also review how a proposed mandate will appear on your returns before you sign it. Our work is comprehensive tax preparation and compliance across both countries. You can see the full scope on our cross-border planning page.
Conclusion
Wealth management fees are now a post-tax cost for almost every American in Britain. The US deduction ended in 2018 and will not return. Furthermore, the surtax ignores the cost. Similarly, Britain allows nothing against income and adds VAT. Meanwhile, the fund wrapper that relieves the cost for British investors is closed to most US citizens.
What remains is structure. For example, dealing commissions reduce gains in both countries. Likewise, fees taken inside a pension come from untaxed money. Accurate records turn those rules into lower tax. Therefore, review how you pay before you review how much.
Contact Us
If your wealth management fees run to five or six figures and you are unsure how they appear on your returns, speak to us before your next filing date. You can book a consultation with our US-UK team, email hello@taxyork.com or call 020 3488 8606. We will review the mandate and both returns together.
Disclaimer
This article provides general information only and reflects US and UK rules as understood in October 2026. It is not tax, legal or investment advice for your circumstances, and it does not recommend any manager, product or fee arrangement. Tax outcomes depend on your full facts. Always obtain professional guidance from a qualified specialist before you agree a mandate or file a return.