The 40pc tax hit for Britain's 200,000 Americans

James Connington 16 October 2016 • 6:37am

Jonathan Chappell, 22 — Jonathan Chappell hit a legislative wall when he tried to invest Credit: Paul Grover

American citizens who live in Britain are continuing to fall foul of punitive taxes two years after the introduction of draconian new rules devised by the US tax authorities.

They are also prevented from making simple investments.

The US is the only country in the world - with the exception of Eritrea - to tax non-resident citizens on income earned overseas. Americans in Britain receive a credit for income tax paid here, and so avoid "double taxation", but at the very least a tax return will need to be filed to the IRS.

When it comes to tax-efficient savings such as Isas, or popular funds including unit trusts and investment trusts, the arrangements break down.

American tax authorities do not recognise Isas and so demand tax on income and gains made in these accounts.

Worse, the authorities view many types of fund as "passive foreign investment companies" - which are subject to punitive rates of tax.

In the past many Americans resident in Britain were unaware of these tax requirements and so failed to disclose them.

But in July 2014 the Foreign Account Tax Compliant Act (or Fatca) was introduced, requiring British banks, brokers and other financial firms to report customer details to America’s Internal Revenue Service.

With these highly-regulated firms now obliged to identify US citizens and pass their details on to the authorities in America, life became suddenly more complex and difficult.

A number of major financial companies based in Britain and elsewhere simply refused to take on US citizen customers.

Kristopher Heck, managing partner of specialist adviser Tanager Wealth Management, said: “The challenge comes when the relevant country’s double taxation agreement with the US is potentially out of date and does not consider newer aspects of tax code such as Isas.”

“Certain investments considered ‘wrong’ by US tax system are taxed at the highest income rate according to the US tax code, so gains are taxed at just under 40pc and treated as income.”

This catches investors who own unit trusts or investment trusts, even if these are held outside an Isa.

Various services have sprung up to try and solve this problem, but tend to cater only for wealthy investors. This can leave those trying to start an investment portfolio high and dry.

Jonathan Chappell, a 22 year old management consultant, is one individual who has run into the legislative brick wall.

He has grown up in the UK, but his dual US citizenship means he is struggling to start investing.

He has £3,500 to invest right now, with regular amounts to follow.

The cost of specialist financial advice means it is out of the question.

Renouncing his US citizenship isn’t an option he wants to consider - even though it is a route many have taken since Fatca was introduced.

He said: “I do think the US tax system for citizens abroad is unfair – the income I generate here should be mine to invest as I wish. The US would be better off simplifying the tax code to increase the efficiency of tax collection in America, rather than punitively taxing the investments of citizens abroad.”

According to Mr Heck: “A US taxpayer should probably hold US domiciled collective investments to minimise, or rather normalise, the US tax implications. Alternatively, they can buy direct shares and bonds to receive more normal taxation.”

He added that savers in Mr Chappell's situation could also “redirect the money into a pension that is not subject to immediate US or UK tax," where it would be possible to invest in unit trusts and other funds.

He explained that the simplest route would be saving the extra money into his employer’s pension plan. This would mean the money was tied up for decades, however.

In the case of self-invested pensions, or "Sipps", he said: “It depends on the structure of the Sipp. Most US accountants treat Sipps as pensions for US tax returns, but this is another grey area of the taxation agreement.”