US expats giving up citizenship due to non-dom rules rising at record levels

by Ray Clancy on July 14, 2010

The costs and administrative obligations associated with Non-dom status are now so onerous that the number of expat Americans renouncing their citizenship and choosing to settle in the UK for the longer term is rising at a record level, it is claimed.

In the final quarter of 2009 no less than 502 US expats renounced their citizenship, the highest in any quarter in recent times and more than twice the total number recorded in 2008.

Whilst for the majority this will seem a step too far, the reporting requirements facing a US Non-dom are now so complex that it is understandable why renunciation seems to some the more attractive option, according to boutique wealth manager London & Capital.

The real cost of US citizenship has become increasingly apparent in recent times and with the US Government keen to reduce its deficit, it seems life as a US Non-dom is set to get worse so specialist investment planning and tax/legal advice is going to be more important than ever, the company says.

With some 182,000 Americans living and working within the UK, it is difficult to size the US Non-dom problem, but the rules and regulations pertaining to their financial affairs are now so draconian that many wealth managers and international banks are simply withdrawing from the market. The Swiss banks refused to service the US Non-dom market long ago.

London & Capital advises clients on their investment affairs to ensure they are complying with the various rules and regulations with which they will need to comply in moving overseas.

‘We are witnessing the emergence of a new breed of New England Expats’, said Daniel Freedman, joint managing director. ‘The real cost of US citizenship has become increasingly apparent in recent times and with the US Government keen to reduce its deficit, it seems life as a US Non-dom is set to get worse.  Specialist investment planning and tax/legal advice is going to be more important than ever,’ he explained.

‘The US Non-dom is today more hotly pursued by the IRS and has become a modern day pariah,’ Freedman added.

The US Non-dom has long experienced financial difficulties at the most basic level, many unable to open a bank account with a UK bank, but where London & Capital observes most difficulties is in relation to the tax treatment of UK investments.

‘Many of the clients referred to us have been badly advised as regards ISA and SIPP investments. Many have been advised to take advantage of the ISA tax shelter to invest in Unit Trusts and OEICs, blissfully unaware that this is just about the only investment which will cause them to fall foul of IRS Passive Foreign Investment Company (PFIC) rules. They will be taxed aggressively on all gains and may be subject to penalties equal to 100% of value,’ said Freedman.

There are just as many problems with SIPPs, which the IRS classifies as a ‘Foreign Trust’. Growth within a SIPP is fully tax deductible. Yet many of the professional clients being referred to London & Capital have been advised to move their pension pot from a company scheme; investments which were once sheltered from the IRS in a company scheme becoming fully tax deductible as a result.

‘For the client, it is both frustrating and costly. Clients are consulting with specialist tax advisers to unravel the mess and it need not be so. Investments can be held within a SIPP if arranged in a certain way and reported, just as a US qualifying insurance policy can be put in place. The good news is that we find that we are able to assist as many as 70% of those who approach us for advice,’ Freedman explained.

The company, which has offices in London and New York runs a series of seminars which address the key issues facing US Non-doms from an investment, tax and legal point of view.  The seminars have so far been hugely popular during the first half of 2010 with the programme due to recommence for the second half of this year in September.

{ 1 comment… read it below or add one }

undrkvabrtha February 16, 2011 at 10:47 pm

Many people who ran their own businesses switched their wealth from USD to AUD and moved their businesses to Singapore around 2006-2009, and this is probably still going on.

I'm guessing it's only a matter of time before being American is more of a bane than a boon.

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