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US expats: The advice you need if your US bank wants to close your account 2020

We have recently been hearing of another wave of complications for American taxpayers living abroad. Many are being contacted by their US bank or brokerage and informed that their accounts are to be restricted or even closed, simply because they reside outside the US with a foreign correspondence address. For the estimated 140,000 Americans living in the UK, the stance adopted by these financial institutions could have a major effect on their wealth, especially their tax affairs, and they should take prompt action.

Why is this happening?

This situation has arisen largely as a result of the Foreign Account Tax Compliance Act (FATCA) but also due to MIFID II, followed by Brexit. FATCA legislation requires banks and brokerages to gather information on their non-US resident clients to fulfil their compliance requirements. These regulations affect bank accounts, brokerage accounts, and retirement accounts (IRA’s and 401k’s).

In some instances, US financial institutions have found the regulations imposed increasingly onerous and administratively cumbersome, especially as the interaction with local legislation differs from country to country. As a result, many have decided to curtail the services they offer to Americans residing overseas either by restricting account facilities (such as sell-only instructions), or worse still, liquidating accounts and issuing a cheque for the balance to account holders.

Impact of having a 401k/IRA liquidated

US taxpayers are likely to find themselves in a challenging situation as a result of the actions taken by banks and brokerages in these circumstances. Not only can they find themselves suddenly faced with the need to select the right investment vehicle in which to reinvest their retirement accounts, but worse still, they could also find themselves unexpectedly triggering a Federal tax liability.

The Internal Revenue Service (IRS) gives an individual just 60 days to move their plans to a new provider, otherwise the proceeds from a retirement account are subject to tax at ordinary income tax rates.

For some individuals the tax rules surrounding these accounts stipulate that the income can be accessed for the first time only after reaching 59 ½ years of age. Taking income earlier gives rise to an additional 10% early withdrawal penalty on the gross amount withdrawn. In addition, this penalty cannot be credited against any corresponding tax liability that the early withdrawal may create, for example, if the taxpayer is resident in another country.

Under the UK/US taxation treaties, such income is taxed in the client’s location, even if the income stream arises in the other country. However, when all of the income is distributed through a lump sum, the tax rights will remain in the US. There may be situations where this is advantageous, but a client’s individual circumstances need to be reviewed ahead of any such distribution to prevent the adverse tax consequences discussed above.

How we can help

Americans resident in the UK who find themselves in this position would benefit from experienced advice from experts in the field of US/UK taxation and international wealth management strategies.

Nathan Prior, Head of International, offers the following advice to US clients in this situation: “Taking professional advice and engaging financial planning as soon as possible is essential to help ensure that your investments and tax-efficient savings (such as 401Ks) are invested in the right financial vehicles and accessed in a suitable and efficient manner. Excluding Passive Foreign Investment Companies (PFIC) and non-reporting funds from your taxable investments is one of key considerations. By engaging with specialists in this area you can avoid expensive mistakes that could give rise to onerous annual reporting requirements and potentially a substantial tax bill.”

Partners Wealth Management is a regulated financial advisor with considerable experience in building financial plans and investment strategies to suit the complex needs of US citizens who are resident in the UK. We work collaboratively with tax advisors, legal professionals and investment managers to ensure all aspects of your personal circumstances are considered in a unified manner.

Please reach contact Nathan with any queries to start on your path to a US/UK efficient financial plan and investment strategy.

Nathan Prior
Partner, Head of PWM International
nprior@partnerswealthmanagement.co.uk
020 7444 4053

 

 

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.