What is FATCA, how can it impact British nationals in the US and what should you do about it?
by Alexander Beard, on Aug 4, 2014 9:33:09 AM
The Foreign Account Tax Compliance Act, or FATCA, is a system designed to recoup tax from US citizens who have foreign investments, but British expatriates based in the US risk being sucked into the system and paying large fines on their investments back home.
A relatively new initiative, FATCA was designed by the US government to recoup some of the estimated $100 billion it loses annually in unpaid taxes by US citizens who either are overseas or have invested overseas. Unlike other countries, the US still taxes citizens even if they spend all or large parts of their time abroad. Whilst these citizens have always been taxed, FATCA imposes more stringent guidelines for reporting, as well as having the agreement of many foreign banks and institutions, giving the US access to a huge amount of financial information on its citizens.
The risk for British expatriates in the US is that they get sucked into the system as US taxpayers. Whilst British expatriates may assume they are paying the correct amount of tax on their US income and any funds which they have left in the UK, the US may deem that their UK investments are non-compliant with FATCA and attempt to levy large fines.
Of real concern for British citizens in the US are arrangements for any pensions they may have at home. The traditional route for many who have emigrated to America has been to engage in a QROPS (Qualifying Recognised Overseas Pension Scheme) transfer, to move their pension to a territory which enables easy access from the US, such as Malta. The problem now is that Malta is also involved with the US FATCA scheme and a QROPS transfer there may well be seen as a chargeable event under FATCA rules.
This type of occurrence is exactly the sort of thing that could see British expats caught out by the FATCA rules, with the changes being so significant that even types of investment or transfer that were previously perfectly acceptable are now at risk.
The recommendation in this complicated area is for British nationals to seek advice if they are at all uncertain about the investments they have outside of the US. The forms required for FATCA can be complicated, especially if you have limited experience of dealing with the US Inland Revenue Service (IRS) and failure to complete forms correctly or on time can also lead to penalties.
With FATCA rolling out throughout several overseas territories, as the US seeks to claim its missing tax revenue, it really is more important than ever for UK expatriates to ensure that their finances are in proper order and that they are reporting them to the IRS correctly.