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MASECO Challenges Facing US clients

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MASECO PRIVATE WEALTH INTRODUCER GUIDE FOR ST. JAMES'S PLACE PARTNERS INTRODUCER GUIDE | CHALLENGES | SJP MPWChallenges315v1 Challenges Facing Your US Clients RULES AND REGULATIONS High net worth US citizens living in the UK face a number of complex challenges when it comes to allocating and investing their assets, from IRS and HMRC dual reporting requirements to conflicting tax considerations. Reporting Obligations to the IRS and HMRC » The US taxes the worldwide income and capital gains of all US citizens regardless of where in the world they live. » The US Bank Secrecy Act states that every US citizen, Green Card holder or resident must file a report of Foreign Bank and Financial Accounts (FBAR) if they have a financial interest in (or signatory authority over) foreign accounts worth $10,000 or more during any one tax year. This includes US beneficiaries of foreign trusts. The FBAR is required because foreign financial institutions (FFIs) may not be subject to the same reporting requirements as US financial institutions. » The passing of the recent Hiring Incentives to Restore Employment (HIRE) Act in the US and its Foreign Account Tax Compliance Act (FATCA) provisions were set up with the explicit aim of tackling offshore tax evasion. The Act requires all FFIs to report all significant accounts held by US taxpayers to the US Internal Revenue Service (IRS). » The UK's introduction of a 'stay-related' threshold (resident for seven of nine years) automatically attracts UK income tax residency status. As of 6th April 2008, UK resident non-domiciles have to pay either an annual (now £50,000) levy to HM Revenue & Customs (HMRC) and continue paying tax on a remittance basis, or they must declare their income and gains on US (and offshore) assets and pay tax in the UK annually on an arising basis. The vast majority of Americans living in the UK elect to pay tax on an arising basis and are therefore taxed by the UK on their global portfolios. TAX ISSUES » Investing in UK or offshore ETFs, Unit Trusts and OEICs will cause them to fall foul of the IRS's Passive Foreign Investment Company (PFIC) rules. They will be taxed aggressively by the IRS and all gains may be subject to taxes and penalties of up to 100% of the growth in value of the investment. » Utilising UK-based savings arrangements such as ISAs and SIPPs may have unattractive US tax consequences for US citizens resident in the UK. ISAs do not enjoy a tax deferred status in the eyes of the IRS and the US tax consequences of SIPPs are even more complex. » The way the IRS classifies UK pensions is complex and beyond the scope of this paper. Most SIPPs would be classified in the US as 'foreign trusts'. As a 'foreign trust', growth within a SIPP is fully taxable. Fortunately, the UK has a treaty with the US that may allow the US taxpayer to claim the SIPP is a Foreign Pension and thus the growth in value will be tax deferred. This same provision may also protect the growth in company pension arrangements from becoming US taxable. Additional US trust reporting may arise for individuals. Many US citizens may consider using a QROPS as a potential pension structure. However, care should be taken as the transfer of assets from a UK pension to an offshore QROPS is usually considered a US taxable event, and the QROPS may also not be covered by the valuable treaty protection on any future growth in value. » HMRC classifies the growth of US Mutual Funds and Exchange Traded Funds (ETFs) as Offshore Income Gains (OIG) and the growth is taxed at the individual's marginal income tax rate rather than at capital gains tax rate. This is because the vast majority are Unregulated Collective Investment Schemes (UCIS) without reporting status. For most wealthy Americans, this would mean being taxed at up to 45% on all gains made on their portfolios. This can be exacerbated if the foreign exchange rate moves in an unfavourable direction. The net result is that there is a much larger gross UK tax liability for Americans who own US Mutual Funds or US based ETFs. INVESTMENT CONSIDERATIONS It is essential to appreciate that Americans are taxed on a worldwide basis, irrespective of where income/gains arise. Coupled with the recent implementation of changes to the domiciliary rules in the UK, this creates an additional set of challenges for US citizens living and working in the UK. Their investments need to be risk-managed, currency-sensitive and tax-compliant. An experienced investment adviser should also consider whether there are any tax-efficient or tax-planning opportunities. There are a number of key considerations in developing an appropriate investment strategy and it is important that they are not looked at in isolation. » Are any of the current investments US Mutual Funds and therefore taxed at income tax levels in the UK? » Are any of the current investments PFICs for US purposes? » Are the client's US education (529) plans structured appropriately for UK residents? » Have appropriate tax wrappers been used to ensure that the currency of assets matches the client's long-term liabilities? » Are the client's foreign tax credits being used effectively? » In the case of couples who are of dual nationality, an understanding of the framework of both tax jurisdictions is vital. » In the case of entrepreneurs, careful wealth structuring can result in flexible investment options. » A deep understanding of legacy plans for US families can be of significant benefit when developing a wealth plan.

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