Philip Teague issues a warning to Britons in the USA about the foreign account tax compliance act
The foreign account tax compliance act (FATCA) became law in March 2010. A key focus of this piece of legislation is reporting by US taxpayers of certain foreign financial accounts and offshore assets. It also covers reporting by financial institutions about financial accounts held by US taxpayers.
The objective of FATCA is ensure the US government gets its tax dollar of assets that US taxpayers have hidden or not reported outside of the US.
British expats in the US may well not consider themselves a tax dodger as they believe they are paying the correct amount of tax in the US and UK. But they may have an issue if they have left behind bank accounts or investments. FATCA will look at the underlying structure of the accounts or investments and if they deem it non-compliant, there could be further taxes to pay.
An example of this is an offshore investment bond which would likely be deemed as a passive foreign investment company (PFIC) and would have its own tax consequences.
For a good number of reasons British expats in the US may want to keep assets outside of the US denominated in sterling. There are investment options to cater for this scenario which are compliant with the rules of the US taxman, the IRS. They allow a British expats in the US to retain sterling investments outside of the US and become tax compliant. They also allow expats to manage currency risk by allowing a switch to US dollars should it be advantageous to do so (and back again if required).
Another area which will be affected by FATCA is the use of qualifying recognised overseas pension schemes (QROPS) by British expats in the US. The majority of QROPS are based in Malta, which has recently signed up to FATCA reporting. There is a widely held belief that should a British expat transfer their UK pension to a QROPS while US resident, this will create a tax charge on the transfer as it will no longer be a qualifying UK pension scheme. Currently the IRS doesn’t know when this happens and Britons just report income, which is taxed through self-assessment. FACTA reporting will mean that the IRS will find out when they transferred to the QROPS and could quite easily issue a tax bill as this a chargeable event.
There are compliant pension schemes available for Britons living in the US which allow them to make use of tried and tested double taxation agreements without using QROPS. These allow the expat to have a US dollar-denominated pension which stays in the UK - therefore remains a qualifying UK pension in the eyes of the IRS.
FACTA’s powers are far reaching and the quantity of information it will uncover will be staggering. It will take the IRS a long time to sift through it all but at some point, if your US/UK financial planning isn’t compliant, you may well get a very unwelcome letter from the taxman. There are a few professional firms who can help you arrange your finances so they are compliant, so you do have options available.