How the American FATCA Legislation is Affecting Britons.

In 2010 new legislation was passed in the US designed to prevent tax avoidance by American citizens working overseas, particularly in Europe. However, as of July this year the “Foreign Account Tax Compliant Act” (or FATCA) also applies in the United Kingdom and could affect British citizens and British companies. The total cost to British companies and individuals has been estimated to be as much as £1bn.

Any bank or financial institution in the UK which has a US operation must, under the FATCA rules, review their customers’ tax information or be subject to a 30 per cent penalty tax applied to their US operations. FATCA effectively places the burden of checking whether any clients owe tax in the US onto the financial institutions by imposing such a high penalty for non-compliance.

US tax laws are applied based on US citizenship rather than our own UK (and most European) tax laws that are based on your main place of residence. What this means in practise is that the majority of financial institutions in order to comply with the law will be contacting any customer who is a US citizen or any non-Americans who have financial links with the US, including anyone who owns property there. Financial institutions must report any details of a US connection through HMRC to the Internal Revenue Service (IRS), HMRC’s American equivalent. Any investments or trusts that are reviewed and found to have no US connection need not be reported.

American citizenship is determined by your place of birth and parents’ citizenship so the legislation affects anyone born in the USA even if they left the US as a child or anyone born outside the USA but with at least one American parent, even if they have never lived in the USA.

Any Britons with financial links to the US can expect to be contacted in the near future. The legislation also affects British individuals who have set up a trust as they will require a review by a qualified accountant as proof that the trust has no links with the US. The cost of compliance with this US law could be hidden by an increase in the fees levied by banks so some people may not even be aware of the added cost.

Whilst the original purpose of the legislation was, commendably, to prevent tax avoidance,  there has been much criticism of it in the press and online because in practise it is a US law that requires UK companies to report details, in some cases, of British citizens, to the American tax authorities. The controversy is compounded by the fact that the UK is footing a bill as potentially high as £1bn for the benefit of the American tax authorities.

US FATCA rules affect BritonsWho is affected by FATCA?

It is expected that hundreds of thousands of people could be affected by the FATCA legislation including:

  • US citizens living in the UK
  • UK residents with a US address (including a correspondence address)
  • Anyone with a US telephone number
  • Anyone who regularly transfers funds to a US account
  • British people born in the US
  • Anyone who travels frequently to the US
  • Those owning property in the US
  • People who have set up a trust (whether or not there is a US connection)

Because of the inconvenience involved in complying with this new law some financial institutions may already be avoiding doing business with Britons who have clear connections on the other side of the Atlantic.

By October 2014 accountants, banks and other financial institutions must identify any clients that will be required to provide HMRC with more information. Tuchbands are chartered accountants and professional tax advisers so for more advice about how FATCA might affect you get in touch or call us on 020 8458 8727.