JUST AS accountants don’t offer financial or investment advice, so wealth managers don’t offer tax advice. Instead, when it comes to recommending investment products, wealth managers need to work hand in hand with accountants and lawyers, rather than compete against them.
Many US citizens and US expatriates, or indeed those with US spouses, are becoming all too aware of the Foreign Account Tax Compliance Act (FATCA), the anti-tax evasion legislation that requires foreign financial institutions to furnish the US Internal Revenue Service (IRS) with information about their American clients and to report those foreign accounts held outside the US.
This new regulatory burden imposed by the US has led to several private banks and other financial institutions shying away from US clients, although we at Vestra US Wealth Management Ltd (Vestra US) have chosen the opposite path of obtaining regulatory authorisation.
That’s why we definitely need the help of accountancy practitioners. Some investments selected in order 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. This becomes especially pertinent once a client has been resident here for more than seven years. It is therefore advisable for clients to avoid all investments which attract negative tax consequences in either jurisdiction.
For example, if a US person, were to buy into unit trusts and OEICs over here, these would be considered to be passive foreign investment companies (PFICs) in the US, and shares or units in a PFIC are liable to US income tax each year on any unrealised gains accrued. Arguably, therefore, if a US citizen holds shares or units in a PFIC for long enough without reporting it correctly, they could find themselves paying up to 100 per cent tax on any realised gain because of all the penalties and interest charges that would be applied.
Given the range and depth of funds available in the UK, it is easy to understand why a UK-resident US citizen might buy into a fund inadvertently without realising the consequences, something that is especially common with ISAs.
For UK-resident American clients, investments in EIS (Enterprise Investment Scheme) companies are becoming more popular as tax-efficient investments and are an attractive alternative to pension contributions, especially as UK pension limits (both lifetime and annual) continue to be reduced. But for EIS investments to work for US citizens, it has to be the right type of EIS. Also, the client should have sufficient foreign tax credits (FTCs) to offset against the income tax relief, otherwise they will simply be reducing their UK tax liability while increasing their US tax liability.
Ensuring insurance meets US criteria
In the UK, insurance-based products are a stalwart amongst financial planners and certainly insurance-based products can also offer a credible investment solution when considering the overall estate-planning and wealth-management needs of US citizens. However, where the UK-resident US citizen is concerned we can help accountants avoid the pitfalls that some clients fall into, specifically investing into insurance products that do not meet the criteria to be US-qualifying and therefore attract negative tax treatment in the US.
When it comes to trustees of trusts with a US connection, there are a number of complex situations that need to be addressed before one gets on to the subject of the investment portfolios. The complexities will ultimately depend on the nature of the trust and the connection to the US, whether that connection is a US settlor, US trustee or a US-resident beneficiary of a foreign non-US trust. FATCA has certainly created complex issues for professional trustees in an age of globe-trotting beneficiaries of foreign trusts. It is therefore even more imperative that accountant trustees work together with wealth managers and lawyers to find solutions to support these clients.
Neil Williams is a director of Vestra US
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