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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Unite stewards urge members to back Owen Smith

In a letter to Unite members, the officials have called for a vote for the longshot candidate.

29 Unite officials have broken ranks and thrown their weight behind Owen Smith’s longshot bid for the Labour leadership in an open letter to their members.

The officials serve as stewards, conveners and negotiators in Britain’s aerospace and shipbuilding industries, and are believed in part to be driven by Jeremy Corbyn’s longstanding opposition to the nuclear deterrent and defence spending more generally.

In the letter to Unite members, who are believed to have been signed up in large numbers to vote in the Labour leadership race, the stewards highlight Smith’s support for extra funding in the NHS and his vision for an industrial strategy.

Corbyn was endorsed by Unite, Labour's largest affliated union and the largest trades union in the country, following votes by Unite's ruling executive committee and policy conference. 

Although few expect the intervention to have a decisive role in the Labour leadership, regarded as a formality for Corbyn, the opposition of Unite workers in these industries may prove significant in Len McCluskey’s bid to be re-elected as general secretary of Unite.

 

The full letter is below:

Britain needs a Labour Government to defend jobs, industry and skills and to promote strong trade unions. As convenors and shop stewards in the manufacturing, defence, aerospace and energy sectors we believe that Owen Smith is the best candidate to lead the Labour Party in opposition and in government.

Owen has made clear his support for the industries we work in. He has spelt out his vision for an industrial strategy which supports great British businesses: investing in infrastructure, research and development, skills and training. He has set out ways to back British industry with new procurement rules to protect jobs and contracts from being outsourced to the lowest bidder. He has demanded a seat at the table during the Brexit negotiations to defend trade union and workers’ rights. Defending manufacturing jobs threatened by Brexit must be at the forefront of the negotiations. He has called for the final deal to be put to the British people via a second referendum or at a general election.

But Owen has also talked about the issues which affect our families and our communities. Investing £60 billion extra over 5 years in the NHS funded through new taxes on the wealthiest. Building 300,000 new homes a year over 5 years, half of which should be social housing. Investing in Sure Start schemes by scrapping the charitable status of private schools. That’s why we are backing Owen.

The Labour Party is at a crossroads. We cannot ignore reality – we need to be radical but we also need to be credible – capable of winning the support of the British people. We need an effective Opposition and we need a Labour Government to put policies into practice that will defend our members’ and their families’ interests. That’s why we are backing Owen.

Steve Hibbert, Convenor Rolls Royce, Derby
Howard Turner, Senior Steward, Walter Frank & Sons Limited
Danny Coleman, Branch Secretary, GE Aviation, Wales
Karl Daly, Deputy Convenor, Rolls Royce, Derby
Nigel Stott, Convenor, BASSA, British Airways
John Brough, Works Convenor, Rolls Royce, Barnoldswick
John Bennett, Site Convenor, Babcock Marine, Devonport, Plymouth
Kevin Langford, Mechanical Convenor, Babcock, Devonport, Plymouth
John McAllister, Convenor, Vector Aerospace Helicopter Services
Garry Andrews, Works Convenor, Rolls Royce, Sunderland
Steve Froggatt, Deputy Convenor, Rolls Royce, Derby
Jim McGivern, Convenor, Rolls Royce, Derby
Alan Bird, Chairman & Senior Rep, Rolls Royce, Derby
Raymond Duguid, Convenor, Babcock, Rosyth
Steve Duke, Senior Staff Rep, Rolls Royce, Barnoldswick
Paul Welsh, Works Convenor, Brush Electrical Machines, Loughborough
Bob Holmes, Manual Convenor, BAE Systems, Warton, Lancs
Simon Hemmings, Staff Convenor, Rolls Royce, Derby
Mick Forbes, Works Convenor, GKN, Birmingham
Ian Bestwick, Chief Negotiator, Rolls Royce Submarines, Derby
Mark Barron, Senior Staff Rep, Pallion, Sunderland
Ian Hodgkison, Chief Negotiator, PCO, Rolls Royce
Joe O’Gorman, Convenor, BAE Systems, Maritime Services, Portsmouth
Azza Samms, Manual Workers Convenor, BAE Systems Submarines, Barrow
Dave Thompson, Staff Convenor, BAE Systems Submarines, Barrow
Tim Griffiths, Convenor, BAE Systems Submarines, Barrow
Paul Blake, Convenor, Princess Yachts, Plymouth
Steve Jones, Convenor, Rolls Royce, Bristol
Colin Gosling, Senior Rep, Siemens Traffic Solutions, Poole

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.