James Hambro and Partners has launched an investment service for UK-based US expats to help them navigate the intricacies of both the IRS and HMRC.
JH&P investment manager and partner Rosie Bullard said: "Only two countries in the world tax non-resident citizens on income earned overseas - one is the US, the other is Eritrea. Americans living in Britain have to pay two sets of taxes - to HMRC and the IRS - and often suffer the harshest elements of both regimes.
"They can often offset taxes paid to HMRC against their IRS bill, but if a UK tax rate is lower than the American equivalent, they will probably have to make up the difference. The IRS may not recognise British tax wrappers like ISAs too. So working out how much to pay can be incredibly difficult."
It’s incredibly complicated, and there’s no hiding from the rules"
Adding to the complexity is the fact that each tax authority has different demands for reporting. The US and the UK operate on different financial years (the US operates on the calendar year, rather than April to April.) The IRS requires all transactions during the year to be captured in dollar equivalents, and its accounting methodology for calculating capital gains tax liabilities differs to HMRC's.
For instance, Americans have to take into consideration how long they have held shares. If less than a year it is regarded by the IRS as short-term and taxed as income rather than capital gains.
"It's incredibly complicated, and there's no hiding from the rules. Americans living overseas have to file returns, and non-US institutions that hold accounts for Americans have to report their holdings to the IRS. The challenge these Americans face is therefore twofold: investing wisely without the help of funds and reporting on their performance, because few investment managers provide income and capital gains reports that are compliant with both US and UK tax regimes," Bullard added.
The new JH&P service for Americans is geared to addressing most of these problems. To avoid breach of the PFIC rules, it will eliminate funds, investing instead in high-quality individual companies. Reporting is designed to help fulfil the requirements of both tax authorities.
"We'll help build portfolios that are diverse and appropriate to the risk profile of the investor, and we'll work with their advisers to give them the necessary information in reports. Hopefully, this will remove a lot of the pain of completing next year's tax returns. Sadly, we cannot remove the pain of actually paying the bills," Bullard said.
The Office for National Statistics estimates that around 139,000 Americans live in the UK, but the IRS reporting rules can also cover their non-American spouses and relatives if assets are shared, so many more people are affected by the problem.