Tens of thousands of Americans and their families living in Britain are caught each year in a tangle of tax rules that gets ever more complex. Many may not even realise they owe to the American tax authorities. Rosie Bullard, who has been developing a new investment service for Americans at JH&P, explains.
Only two countries in the world tax non-resident citizens on income earned overseas – one is the US, the other is Eritrea.
The Office for National Statistics estimates that around 139,000 Americans live in the UK, though some put the figure at nearer 250,000. Most of these have to complete two tax returns each year – one for HMRC and one for the American Inland Revenue Service (IRS). Their IRS return is due on June 17th. Working out what tax to pay may be complicated. Extremely complicated.
In many ways Americans living in Britain suffer the harshest elements of both tax regimes. They can in many cases offset taxes paid to HMRC against their IRS bill, but not always, and if a UK tax rate is lower than the American equivalent, they will likely have to make up the difference. Individuals may also not be aware that tax efficient savings schemes given to UK tax payers may not be recognised by the IRS, such as ISAs.
For many years Americans in the UK did not realise the requirements to file tax returns but recent US Government initiatives, such as the Foreign Account Tax Compliance Act (FATCA) changed this. The effect was not only on individuals to report but wider ranging, in some cases affecting spouses and trustees of trusts with US beneficiaries.
One of the biggest issues American ex-pats face is how to invest appropriately given US tax legislation. This includes avoiding Passive Foreign Investment Companies (PFICs), as they can incur punitive tax rates. It can take significant time for accountants to calculate the tax due on these, which can add to the costs for the investor. Unfortunately most UK collective investment schemes, such as unit trusts, are classified as PFICs, and that means UK-based American investors miss out on many popular investments. When investing into US domiciled funds, they may face the challenge of those funds not having UK reporting status, which can have a negative impact from a UK tax perspective too.
There is no hiding from this. The IRS requires non-US institutions that hold accounts for Americans to report their holdings to the IRS.
Without the easy fund choices available to most UK investors, American ex-pats run the risk of building very narrowly focused portfolios, loaded with hidden correlations that increase their investment risk. This is where our expertise in stock selection comes to the fore.
The portfolio of a JH&P client with US reporting requirements will not include funds, but we will still invest in the same high-quality individual companies and we will pay particular attention to ensuring that American clients enjoy the same geographic, sector, style and factor diversification as their UK peers. They will obviously get the same team strength and service quality too. Our ability to manage bespoke portfolios is important, particularly for a family where one has US reporting requirements and the rest of the family do not.
The other problem Americans face is around reporting. The IRS requires them to supply information on not just their holdings but income and capital gains. This sounds easy – most investment managers and platforms automatically provide this information in investment reports. However, few can provide income and capital gains reports that are compliant with both US and UK tax regimes.
The first problem is differing tax years – the US operates on the calendar year; our financial year is April to April. Secondly, the IRS requires all transactions during the year to be captured in dollar equivalents. Finally, there is the problem of assessing capital gains – over the short term and the long term. In general, shares held for less than a year are regarded by the IRS as short-term and taxed as income rather than capital gains (in the UK there is no distinction). The accounting methodology for calculating capital gains tax liabilities differs too, making reporting for each authority different and complex.
The JH&P solution
Americans coming to JH&P can be confident that we will work with their advisers to ensure portfolios comply with the tax regimes on both sides of the Atlantic. We will also provide clear reporting that makes it easy to complete both tax returns. We hope to take away much of the pain of calculating what Americans living in Britain owe the tax authorities. Sadly, we cannot remove the pain of actually paying the bills.
18 June 2019
This is not advice and you should not act on the content of this comment without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.