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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Why Podemos will defeat the Spanish Socialists

A new alliance on the Spanish Left will be stronger than the sum of its parts.

On Saturday morning, on a palm-tree lined promenade in the small city of Badalona in eastern Catalonia, a 38-year-old woman named Mar García Puig fanned herself with her speaking notes after taking her turn on the stage.

Until six months ago, Puig was a literary editor with no professional experience in politics apart from attending demonstrations and rallies. Then, in December, her life was transformed twice over. In the national election, she won a parliamentary seat for En Comú Podem, the Catalan regional ally of the anti-austerity party Podemos. Four hours after she learned of her victory, Puig gave birth to twins.

Fortunately Puig’s husband, who is a teacher, was able to take paternity leave so that she could take up her seat. In parliament, Puig “felt like an alien”, she told me over coffee. As it turned out, she had to give up her seat prematurely anyway – along with all the other Spanish MPs – when repeated attempts to form a government failed. So now, in the lead-up to Spain’s first repeat election of the modern era, to be held on 26 June, Puig was on the campaign trail once more in a drive to win a parliamentary seat.

The December general election was as historic as it was inconclusive, ushering in a novel political era in Spain and leaving the country with the most fragmented parliament in its history. Fed up with corruption, austerity and a weak recovery from the global financial crisis, voters punished the mainstream parties, ending the 40-year dominance of the conservative Partido Popular (People’s Party) and the centre-left PSOE (Spanish Socialist Workers’ Party), which have held power since the death of General Franco. Neither group was able to win an absolute majority as new parties from both ends of the political spectrum garnered support from disenchanted voters.

On the left, Podemos, which was only founded in March 2014 by the ponytailed political scientist Pablo Iglesias, won 20 per cent of the vote. Ciudadanos (Citizens), formed in Catalonia a decade ago and occupying the centre left or centre right, depending on which analyst you talk to, secured a 14 per cent share.

Despite having four months to form a coalition government, the two biggest political parties could not reach a deal. The People’s Party, which had implemented a harsh austerity package over the past five years, recorded its worst electoral performance since 1989, losing 16 percentage points. It still won the most votes, however, and Prime Minister Mariano Rajoy was the first leader to be asked by King Felipe VI to form a government.

By the end of January, Rajoy conceded defeat after the PSOE refused to join his “grand coalition”. The Socialists then failed in their own attempt to form a government, leading the king to dissolve parliament and call a fresh election.

Despite the inconvenience of having to campaign nationwide once again – and being away from her twins – Mar García Puig’s enthusiasm for her new career is undiminished. “In Spain there is a window of opportunity,” she said. “There is a receptiveness to politics that there wasn’t before.”

When the repeat elections were called, some questioned whether Podemos and its regional allies could mobilise its supporters to the same extent as in December. Yet Puig believes that the party’s appeal has grown further in the six months that the country has been without a government. “We are still new and Podemos has this freshness – it can still make people join,” she told me.

The following day, as the church bells rang at noon in the Basque city of Bilbao, crowds gathered for another rally. For protection against the sun, Podemos supporters had covered their heads with purple triangular paper hats displaying the party name as it will appear on the ballot paper: Unidos Podemos, or “United We Can”.

In May, Podemos entered into an alliance with Izquierda Unida (United Left), the radical left-wing party that includes the Communist Party of Spain, and which won 3 per cent of the vote in December. Izquierda Unida is headed by Alberto Garzón, a 30-year-old Marxist economist who, according to a poll by the state-run CIS research institute, is the most highly rated party leader in Spain. Unlike Podemos’s Iglesias, who can fire up a crowd and is seen by some as divisive, Garzón is a calm and articulate politician who appeals to disaffected voters.

Nagua Alba, who at 26 is Podemos’s youngest MP, said the new alliance would be stronger than the sum of its parts, because Spain’s voting system punishes smaller parties when it comes to allocating seats in parliament. “It [the alliance] will attract all those people that aren’t convinced yet. It shows we can all work together,” Alba said.

As part of the agreement with Podemos, Izquierda Unida has agreed to drop its demands for a programme of renationalisation and withdrawing Spain from Nato. The alliance is campaigning on a platform of reversing Rajoy’s labour reforms, removing the national debt ceiling, opposing the TTIP trade deal, and increasing the minimum wage to €900 a month. A Unidos Podemos government would attempt to move the EU’s economic policy away from austerity and towards a more expansionist stance, joining a broader effort that involves Greece, Italy and Portugal. It is also committed to offering the Catalans a referendum on independence, a move that the mainstream parties strongly oppose.

The latest polls suggest that Unidos Podemos will become Spain’s second-biggest party, with 26 per cent of the vote, behind Rajoy’s Popular Party. The Socialist Party looks poised to fall into third place, with 21 per cent, and Ciudadanos is expected to hold its 14 per cent share. If the polls are accurate, the PSOE will face a difficult choice that highlights how far its stock has fallen. It can choose to enter as a junior partner into a coalition with the insurgent left, which has politically outmanoeuvred it. Or it could decide to prop up a Partido Popular-led right-wing coalition, serving as a constraint on power. 

This article first appeared in the 23 June 2016 issue of the New Statesman, Divided Britain