DeVere Group CEO, Nigel Green has called the legislation horrific and, in a recent YouTube video, compared it to communism – “something that only sounds like a good idea”.
But, while it has raised both the ire of advisers and the reporting costs associated with US clients, from an advice point of view, very little has changed.
According to Paul Nixon, director at Vestra US Wealth Management, FATCA hasn’t changed the rules for US and US-connected people at all. What it has done is forced any institution advising US clients to report those accounts that are US connected.
The implications of this are twofold.
Bifurcation
“All FATCA has done is make the US-connected space more binary,” says Nixon.
Increasingly, from a UK adviser point of view, either it is something you understand and are able to advise clients on adequately, or it is something to avoid.
There is also a financial and regulatory incentive to avoid dabbling ones toes into the space, as Andy
Thompson, director of operations at the Wealth Management Association, told Portfolio Adviser recently: “While the registration process is relatively straightforward, the due diligence for all pre-existing accounts and every new account is a huge undertaking for any firm, big or small as is the amount of information that will have to be reported for relevant accounts,” he says.
Indeed, Green makes a similar point in his video saying that the cost of compliance that is estimated will run into the billions of dollars for banks and insurance companies has meant that a number of banks and institutions are seeking to avoid taking on US clients rather than deal with it.
Caught out
The second implication, is perhaps a little more subtle and is the one that UK advisers should probably be paying more attention to.
According to Nixon, even before FATCA came into effect, not everyone advising US clients was completely au fait with the US treatment of certain UK centric investments. The result of this is that some clients were put into investments that aren’t as tax efficient as they might otherwise assume. The reality now is that institutions are having to report their accounts with a US connection to the US authorities and subsequently many people are only now learning of the US tax consequences of the investments they hold. A good example of such a blindspot, says Nixon, is an investment in Passive Foreign Investment Companies (PFIC).
A PFIC is defined as a corporation where at least 75% of its income is based on investments rather than standard operating business, or where at least 50% of its assets are investments that produce interest, dividends and/or capital gains.
This then includes what US tax authorities classify as foreign-based mutual funds. While US and US-connected citizens are able to invest in such funds, they would most likely be liable for income tax on all distributions and appreciated share values regardless of whether or not capital gains rates would normally apply. This is completely unrelated to FATCA and is by no means a new ruling, but is not something necessarily as well-known as it should be.
Another common problem facing US expats is where their advisers may have looked to use offshore bonds, where similar concerns should apply.
This means, that for US clients, many investments might not be as efficient from a tax point of view as they might initially look.
Where to from here?
For Nixon, the key is to identify your market. “There has been a significant increase in ‘accidental Americans’, people that often don’t realise they retain their American citizenship or Greencard as they haven’t lived in the US for many years. However they still have a US tax reporting obligation. We therefore work closely with the clients’ lawyer and accountant to ensure their affairs are both structured and reported correctly."
For advisers, this means, the question is not whether or not one should register and comply, but rather if they are able to afford the cost of compliance and are able to provide the knowledge and level of service US expatriate clients require.
