From an American point of view, the UK is perhaps the most obvious destination for expatriation in Europe.
After all, the shared language makes the move from America to the UK easier than to non-anglophone countries on the continent, although some would argue that the US and the UK are two countries separated by a common language.
According to the ONS, between 121,000 and 157,000 Americans are calling the UK home.
California-born Victory Hill Capital Group chief executive officer Anthony Catachanas is one of those Americans who chose to establish themselves on this side of the pond.
“I came to the UK nearly 20 years ago as a student, and while I left to go work in Germany for a few years, I eventually came back, because this is where the opportunities were, and this is the country on this side of the Atlantic where I felt most comfortable in,” he says.
“The UK is the least continuous country for an American to move to in the world, except for maybe Canada. Both Canada and the UK have harboured large communities of Americans since the 18th century and the US became independent.
“The language helps a great deal, but culturally there are great similarities, which help Americans feel comfortable very fast.”
Despite those advantages, moving from the US to another country, such as for the UK for instance, is not free of hassles.
This is because the US tax system is based on citizenship and not on residency status. In other words, American expats in the UK are liable for tax on both shores of the pond.
Tax specificities
The introduction of the Foreign Account Tax Compliance Act (FATCA) in the US in 2010 added burdens on financial firms working with American clients.
Evelyn Partners partner Adam Smith says: “FATCA imposed regulations on all foreign financial institutions for them to recognise who their US clients are and provide information on them to the Internal Revenue Service (IRS).
“We all have to fill out more forms because of FATCA. If you were to open a bank account now, it would likely ask you if you are connected to the US and what citizenships you hold.
“Some of that has to do with the Common Reporting Standard that came off the back of FATCA.
“It did increase the compliance burden for Americans. As part of their income tax returns, they must disclose all of their foreign financial assets. If they’ve got non-US bank accounts, if they put shareholdings in companies, even if they’ve made loans, they have to disclose any kind of foreign financial asset to the IRS.
“They provide this information to HMRC that then goes over to the to the IRS. All financial institutions have the same obligations.”
As a result, American expats may experience difficulties when trying to find a financial firm willing to serve them.
Smith adds: “We went through a period of time where certain institutions were not happy dealing with Americans and they effectively kicked US citizens out of those institutions.
“They thought that would help with their FATCA compliance, although I’m not sure it ever did.
“It’s not quite so bad now for Americans who need banking facilities in the UK, but there was a period of time after FATCA came in where it became very difficult for Americans to do any kind of banking or operate their financial affairs overseas.”
A tax treaty between the UK and the US entered into force in March 2003 to prevent double taxation. This has made the life of American residents in the UK easier.
“Generally, the UK income tax rates are higher than the US tax rates, so they should own very little tax to the US if they’re paying UK income tax,” Smith adds.
The challenges of advising American expats
Nonetheless, financial advisers considering onboarding American clients might still find that serving them comes with challenges.
Timothy James & Partners financial adviser Jessica Ayres says: “Holistic financial planning for any client goes further than understanding a client’s attitude to risk, financial objectives and needs.
“It involves gaining detailed information on their existing pensions, investments and other provisions as well as their current tax position.
“Therein lies a problem when advising any client with multiple tax reporting jurisdictions.”
For instance, dealing with US providers is rarely a seamless process.
Ayres adds: “US pension providers will often refuse to liaise with third parties and therefore the client must do a lot more legwork than an average UK client.
“It takes time to get the client to provide the required information just to make a basic assessment of their current US investments.“
Moreover, some UK financial products are not available to US clients, or at least without their advantageous properties. For example, an ISA does not fully shelter Americans living in the UK from tax liabilities.
Craufurd Hale Wealth Management director Haresh Raghwani says: “ISAs do not help shelter tax because the IRS does not recognise the wrapper. However, the ISA is sheltered from UK tax. It is more efficient than holding funds within a GIA.”
Another issue with investments for US expats is that they need investment products that are suitable for both UK and US regulation and tax systems.
In other words, their investments need to be made via managers who are regulated by the US regulator, the Securities and Exchange Commission (SEC). Such managers tend to have high minimum investment levels.
Raghwani says: “The main issue is finding an investment solution that caters for this size of holding.
“Most investment houses have minimums investment amount as a US client needs to hold direct equities/bonds etc to not fall foul of the Passive Foreign Investment Company (PFIC) rules.
“HMRC has a list of ETFs which have UK reporting status and domiciled in the US which means clients avoid the PFIC issues.
“This is a minefield and is better left to the investment experts.”
An option for US clients is to contribute to a UK pension, but this solution comes with its own limitations.
Ayres says: “Both financial and tax advice are required to ensure pension contribution limits are not exceeded in both the UK and US.
“In addition, pensions are not always suitable for younger clients who may want access to the funds prior to retirement.”
Due to those specificities and the fact American expats are tax liable across two jurisdictions, they may need to work with an adviser in each country.
“I do have specialised banking services in both the UK and the US. It is impossible not to have both for any US citizen living abroad,” Catachanas says.
Yet, the collaboration between US and UK advisers do not always work as well as one would hope for.
“Both often have a poor understanding of investments and taxation in the other jurisdiction. Very often they can contradict each other,” Ayres says.
Those are things that Raghwani witnessed first-hand.
He says: “I have seen instances when advice was provided incorrectly by advisers.
They’ve put a US client on a platform and opened various tax wrappers and then used Vanguard or Blackrock passive funds because they are American.
“This has meant issues for the client because they haven’t reported their income.”
Raghwani suggests that advisers encountering US clients might want to refer to specialists.
Another complication, which is not specific to Americans but common to all expats, is that they might be temporarily in the UK. As a result, UK advisers might be working with their US clients on variable time horizons.
Evelyn Partners partner Wayne Ellis says: “It certainly has an impact as any financial plan has to be considerate to the US jurisdiction due to the intention to return to the US, while also ensuring that the plan works should the client stay longer or even permanently in the UK.
“The first principle has to be ‘do not harm’ considering that much of standard UK financial planning causes problem should the client return to the US and vice versa with US planning having adverse knock-on effects in the UK.”
For US clients looking to stay permanently in the UK and potentially to spend their old days here, advisers may want to tell them more about the challenges of mitigating the UK inheritance tax (IHT) and building up a retirement fund.
Ayres says: “Compared to the UK’s modest IHT annual exemption, the US estate tax threshold is over $12m (£9.85m).
“The client needs educating on the need to build in IHT planning early in the advice process, and to seek advice to ‘ring-fence’ non-UK assets before becoming deemed domiciled in the UK.
“The same adjustment in retirement planning is required. Social Security (SS) benefits are extremely generous compared to the State Pension provision.
“Long-term UK residents will fall foul of the Windfall Elimination Provision (WEP) which reduces SS benefits for the time social security taxes were not paid. WEP is not reflected in SS statements and comes as a shock.”
A particular case: dual citizenships
Individuals with dual UK-US citizenships or households where one party is a US citizen and the other isn’t add another layer of complexity.
A striking example of this is in cases where an individual or household is selling their principal private residence.
“The sale of your personal private residence is normally tax free in the UK, but it isn’t in the US. An individual gets a $250,000 exemption on the gain, but any gain above that is taxed,” Smith says.
This is something former UK prime minister Boris Johnson experienced himself. A list published by the US Treasury department in 2016 showed that the New York-born previous London mayor renounced his American Citizenship.
The Guardian suggested that his motivation was to get out of reach of the IRS.
In November 2014, Johnson received a capital gains tax bill from the US, which he called “absolutely outrageous”.
“I think, you know, I’m not a … I, you know, I haven’t lived in the United States for, you know, well, since I was five years old … I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work,” he said.
As a result, careful structuring around the property ownership is required in households with partners of different nationalities.
Ayres also warns that there are implications for children born in families with an American parent.
She says: “Advisers will often mitigate US reporting requirements by holding investments in the UK citizen’s name.
“However, when children come along, it is easy to forget that they will likely be US citizens and mistakes can be made when funding children’s savings and investments.”
What skills do you need to advise US clients?
American clients differ from other expats due to the US tax system and its implications for US citizens living overseas. Therefore, advisers might need a set of specific skills if they want to achieve the best outcomes for their US clients.
“It’s imperative to have a sound understanding of how financial planning, investments and financial products are treated under both the US and UK tax regimes as there can be a significant detrimental impact where planning does not take account of both jurisdictions,” Ellis says.
Raghwani also recommends to carefully read the books of the Uniform Investment Adviser Law Exam, also called Series 65.
This qualification is meant for individuals aspiring to become an investor adviser representative in the US, but it will also provide UK advisers serving US clients with an understanding of the other jurisdiction.
Raghwani says: “It has taken me a few years to build up my knowledge in this area.
“I have read through the Series 65 book, which gives you the background of how pension plans and investment work in the US.
“The Series 65 qualification is focused more on the legal aspects rather than financial planning.
“Advisers need to spend time with US tax specialists and spend time reading through case studies and understanding PFIC rules. An adviser needs to build up a niche and invest time learning.”
