How Americans in Britain became "toxic citizens"

After FACTA.

"We have become toxic citizens," says Andy Sundberg, the founder of American Citizens Abroad. To what is he referring? Congress passed FATCA (Foreign Account Tax Compliance Act) in 2010, designed to address the issue of US citizens evading tax by using Swiss bank accounts. Those financial institutions wishing to retain their US clients must in future report US account holders to the relevant authorities. This has resulted in several leading private banks deciding to withdraw from the fray, thus rendering their US clients orphans.

This has caused great consternation in the UK, where there are 177,000 Americans (according to the 2011 Census), many of whom have been here a long time. Indeed, some have chosen to settle here permanently or perhaps indefinitely, marrying non-American spouses and educating their children at British schools and universities. Many of them have earned substantial salaries and bonuses in financial services or in law, and until recently, their wealth management needs have been serviced by the full gamut of British and European private banks. Now all this has changed.

Essentially, FATCA is forcing foreign financial institutions to identify and report the accounts and investments of their American clients. The reporting obligation is what is driving many institutions into pushing their US clients away. All the banks, custody houses, trust companies, and insurance companies in Britain that have US citizens as clients now have an obligation to identify who meets the definition of a ‘"US person" and then they have to furnish such information to the authorities who in turn will provide the information to the IRS.

It is certainly having the desired effect as far as the IRS is concerned, since over 600,000 US citizens living overseas filed a Report of Foreign Bank and Financial Accounts (FBAR) in 2011 following greater awareness of FATCA, compared to fewer than 300,000 in 2009. FATCA is flushing everyone out into the open and forcing them to sort out their affairs. Nonetheless, those 600,000 are one-tenth of the 6.3 million US persons living in 160 countries around the world.

Companies like mine, Vestra Wealth, have decided to respond differently to FATCA, preferring to see it less as a catastrophe and more as an opportunity. When FATCA was introduced, the partners agreed that there was a significant opportunity to let us create the infrastructure for a dedicated US team. This was driven primarily by client need, as we found that there are a number of British nationals resident in the US as well as US citizens living in the UK, all of who were seeking investment services. So as of May this year we have been registered with the Securities and Exchange Commission (SEC) in the US as well as being fully regulated by the Financial Conduct Authority (FCA) in the UK.

The US is one of the few countries in the world who taxes its citizens on their worldwide income and gains, regardless of residency status. US residents and non-resident citizens (including Green Card holders) have therefore always had an obligation to report their annual income and gains to the US authorities. All that a US citizen with wealth management requirements in the UK needs to know is that their chance of being caught up in the FATCA net has vastly increased, so they should ensure their affairs are structured and reported correctly.

When a new client comes to us at Vestra US we conduct a rigorous assessment of their affairs to ensure everything is in line. If the client has been unintentionally delinquent in the past, or possibly even misadvised, then we put them in touch with the appropriate legal advisers and accountants, so that we are able to start with a level playing field before giving them investment advice.

Most of our clients are US professionals working in the City of London or Mayfair, who are often too busy to manage their own affairs let alone understand both the UK and US consequences of different investments. For example, some investments set up in the UK to be tax-efficient in the UK are inefficient in the US, and some investments set up to be tax-efficient in the US are inefficient in the UK once you have been resident here for over seven years.

The standard UK-based wealth management solution often involves funds, unit trusts and OEICs. Yet from a US perspective these are considered to be Passive Foreign Investment Companies (PFICs), with all the gains accrued therein liable to US income tax at 39.6 per cent. There is also a reporting requirement with a PFIC, so the problem compounds itself if you fail to declare such investments for several years.

If you hold a PFIC for long enough without reporting it, you could find yourself paying up to 100 per cent tax on any realised gain because of all the penalties and compounded interest charges that would be applied. Therefore we look to structure investment portfolios which would not attract negative tax in either jurisdiction.

As pension lifetime limits keep coming down, along with annual pension contribution limits, so investments in EIS (Enterprise Investment Scheme) companies are becoming more popular. However, it has to be the right type of EIS. It is necessary to ensure the client has sufficient foreign tax credits to offset the relief in the UK, otherwise you are simply reducing UK tax and increasing US tax.

You also have to ensure you do not breach any of the other rules around percentage ownership or the number of Americans that own assets within the EIS. Managed correctly, it is a great way for a US client to utilise their foreign tax credits (under the Double Taxation Agreement) while at the same time increasing their overall tax efficiency.

With mixed marriages between one US citizen and one non-US citizen, the wealth manager needs to make sure that ownership of assets and their respective wills are structured correctly. Certainly in my experience there are a large number of UK-resident Americans who have been shoe-horned into inappropriate products, whether PFICs within ISAs, non-qualifying pensions or insurance policies.

We know the red flags and we know the people who can help resolve the situation. There are scenarios where a client and their estate could end up paying dual inheritance tax for example. US clients need a triumvirate of advisers – a wealth manager, an accountant, and attorney – who are fully aligned and work in a cohesive, not competitive, manner.

Vestra US also advises professionals going to work on Wall Street or elsewhere in the US, who often have investments and pensions that can be structured correctly for US tax purposes or which permit deferral of US capital gains tax and income tax while they are US-resident for tax purposes. We would look to establish a fully US-compliant life insurance wrapper for the client that defers the annual taxation and allows investments to be made into PFICs without penalty or annual reporting.

I have enjoyed playing British American Football, for the London Warriors, in a small British summer league, and I often think the US tax regulations are similar to the rules governing American football. The first time you watch the game it is very difficult to understand what is happening. But once you know that there is an offence and a defence, and that you have four attempts to move the ball ten yards otherwise the other team gains possession, it is suddenly not too difficult to comprehend.

It is the same with running money for US citizens in the UK. There are numerous rules and regulations to consider, but once you know what they are, there is no need to feel intimidated.

Paul Nixon is a director of Vestra US

This piece first appeared on Spear's.

American tourists in Madame Tussards. Photograph: Getty Images

This is a story from the team at Spears magazine.

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue