Paul Nixon, director at Vestra US Wealth Management Limited, comments on the issues of having unknown connections with the US
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According to the US Department of State, there are over 8.7 million US citizens living overseas1. Although many commentators suggest this number could be as low as 5 million, it is still a significant number of individuals who are subject to global taxation and reporting. With increased tax and reporting requirements for both individuals and financial institutions, this has led to a "new
un-American record" 2 of renouncing US citizenship, with the number of people expatriating being reported to have risen from an average of 482 during the George W. Bush years, to 3,415 in 20143.
A popular reason for this, and one that has gained much press coverage, is the introduction of the Foreign Account Tax Compliance Act ("FATCA") and increased US compliance. At Vestra US, we decided to respond differently to FATCA, preferring to see it less as a catastrophe and more as an opportunity. We were aware of the impact that these changes in legislation had and knew there was a need for persons with a connection to the US to have their investments looked after by an entity dedicated to creating investment solutions specifically for clients paying their taxes in both jurisdictions.
However, it is important to emphasise that FATCA has not changed any of the rules affecting US persons. It is an information gathering exercise which has coerced financial institutions into reporting those clients who have a US nexus.
Through this new reporting requirement, we have seen a significant number of cases of ‘Accidental Americans’, where clients do not realise they are classified as a US citizen by the IRS. For example those who left the US a long time ago, children born to US parents or simply those who haven’t relinquished their Green Card and are still, unknowingly, bound by it. This often means that their investments are not correctly structured and they have, unintentionally, reported their income incorrectly.
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By GlobalDataSo let us review the major concerns for these individuals, who by choice or default will remain US tax payers overseas:
– Double Taxation
– Multi Currency Risk
– Investment Constraints
– Inheritance Tax
– Sale of Property
– Foreign Tax Credits
– Trusts
– US Reporting
One of the most common issues we see when clients visit us for the first time involve individuals with a US Tax reporting obligation holding PFICs. This is an acronym that many people may never have heard of until their accountant raises the issue of the US tax liability on such holdings. The term Passive Foreign Investment Companies (PFICs) covers all sorts of investments, but those that cause the most issues are related to UK and European funds that individuals invest into without taking into account the potentially onerous US tax consequences, which in some circumstances can reach 100%. There are also many issues connected to Offshore Bonds, Controlled Foreign Corporations and certain share classes that must be taken into account when building a portfolio. Whenever we encounter a client with these problems, we work with their tax advisers to extricate them from the situation in as efficient manner as possible, prior to rebuilding the portfolio in line with US reporting obligations. Then depending upon the clients’ residence, tax status and account type we may or may not have to add a secondary filter to ensure local compliance in addition to US matters.
Although all of these issues can be daunting for a client, with the correct investment advice and suitable planning, a US taxpayer can still structure their affairs to be in line with both US and local jurisdictional requirements and benefit from investments into the global markets.
Paul Nixon, director at Vestra US Wealth Management Limited
