What financial advisers need to know about their American clients

Where financial advisers deal with American citizens living outside the US, they need to be aware of a range of challenging investment and tax requirements

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Jul 03, 2019

Investing for Americans living outside the US comes with a number of complications. These clients will likely be subject to additional tax and reporting requirements and face a number of restrictions when it comes to investment. Their advisers need to be alert to the potential problems – and able to suggest solutions.

These complex rules can touch a surprisingly large number of people. Most obviously, they apply to American citizens living and working abroad. But they can also apply to a wider group of “US persons”, which can include individuals with a less immediately apparent connection to the US – for instance, those with an American parent.

In 2016, the US State Department estimated that there were as many as 200,000 “US persons” resident in the UK.

Within Schroders a specialist team, Schroders Wealth Management (US) Limited, has been established to help these clients – and their advisers – navigate undoubtedly tricky waters.

What follows are some of the key complications faced by US persons living outside the US.

Firstly, there are additional reporting requirements. With very few exceptions, Americans living overseas are required to file a tax return with the US tax authority, the IRS – and potentially pay additional tax. This is the case even though they will likely also be filing tax returns, and paying taxes, in the countries in which they live.

The requirements don’t end there. They may also have to file a Foreign Bank Account Report if they have non-US bank accounts holding more than a defined balance (currently $10,000) at any point within the tax year. This requirement is relatively new and is separate from an individual’s tax returns. As a result, it has caught many unawares.

Secondly, there are investment constraints. The key one relates to investments in what are known as “passive foreign investment companies”, or PFICs.

In essence, a “PFIC” is a non-US mutual fund. These are taxed disadvantageously by the IRS and Americans abroad ideally should avoid them.

This is easier said than done, however. Most collective investments – such as unit trusts or open-ended investment companies in the UK – are deemed to be PFICs for US purposes. This presents difficulties for many advisers, as it requires portfolios to be developed by specialists familiar with US rules.

Read in more detail about the tax and investment problems facing US expats

Martin Heale, head of Schroders Wealth Management (US) Limited, says “Americans moving to the UK generally know they need to use a US qualified lawyer and accountant – but many do not appreciate the need for a US qualified investment manager. We are frequently asked to review US citizens’ portfolios to see if the investments selected by a non-US qualified investment manager are suitable for both tax efficiency and the SEC (Securities and Exchange Commission).”

It’s also worth bearing in mind that common non-US pension structures can entail extra complexity for Americans. For instance, investments in a SIPP (Self Invested Pension Plan), though not subject to UK tax, might (or might not) be taxable year-on-year by the US. At the very least, there will likely be annual filing requirements with the IRS. The necessary reporting can be significant and costly.

Another consideration for Americans living abroad is capital gains tax on the sale an overseas home. This is the case even in a country, such as the United Kingdom, that doesn’t tax gains made upon the sale of its citizens’ main personal residences.

Schroders is one of a very small number of UK firms that has invested in providing wealth management services to this group of clients. The London-based team has obtained a licence from the US regulator, the Securities Exchange Commission, and has long experience of the complex issues facing US persons and their advisers.

Nick Georgiadis

Head of DFM Team Schroders

Nick joined in 1981 and is a Portfolio Director where he heads up the DFM team, which specialises in providing discretionary fund management to clients of Independent Financial Advisers. The team has been one of the fastest growing areas of Cazenove Capital. He is registered with the Securities Institute and holds the CISI Wealth Management diploma. Nick has over 20 years’ investment experience.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated. 

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Cazenove Capital

Cazenove Capital is the wealth management arm of Schroders in the UK and Channel Islands, providing investment management services to private clients, intermediaries and charities. The company’s strength is founded on the lasting relationships built with advisers and their clients, combined with access to the global expertise of the Schroders group. The DFM team has worked closely with financial advisers for 17 years meeting their individual requirements and supporting them in providing discretionary fund management to their clients.

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