Finance and Tax Blog for individuals and companies

Last Thursday, 26 July, the UK Government issued a joint statement with the governments of France, Germany, Italy, Spain and the United States, announcing the publication of the Model Intergovernmental Agreement (IGA) to improve tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This will be of interest to financial institutions outside the US dealing with investments and financial products sold to US persons. Such parties will need to look at their respective responsibilities in order to comply with the regulations.

The IRS has recently published its ruling that the UK remittance basis charge (RBC) is an income tax for which credit is allowed to US citizens and green card holders under US tax law.

Finance Act 2008 introduced changes to the UK taxation of non-UK domiciled individuals resident in the UK including the introduction of the RBC for those non-domiciled individuals who have been resident in the UK for seven out of the previous nine years preceding the tax year in questions and who elect to be taxed on the remittance basis. The RBC is GBP £30,000 rising to GBP £50,000 for non-domiciled individuals living in the UK for twelve years.

The full text of the ruling can be found at: www.irs.gov/pub/irs-drop/rr-11-19.pdf

Under FACTA 2010 US taxpayers holding financial assets outside the US must report these to the IRS on a new Form Number 8938 which was released in draft in June 2011. In particular the information reporting rules apply for assets held since 1 January 2011 and require US individuals with interests in non-US bank accounts, brokerage accounts, pension plans, companies, partnerships, investment funds and other financial assets to file this new form with their US tax return in 2012. This significantly increases the compliance burden for those firms in the financial services industry acting on behalf of such US individuals.

Recent changes to the remittance basis of taxation of non-UK domiciled resident individuals coupled with the introduction of the UK reporting fund regime with effect from 1 December 2009 have produced an interesting outcome for US domiciled individuals resident in the UK. Broadly such individuals are now subject to UK tax on worldwide income and gains unless they elect subject to UK resident timeframe and eligible conditions to retain the remittance basis of taxation. There is an incentive for US fund managers of US Regulated Investment Companies (known as 40 Act Funds) to apply to join the UK reporting fund regime so that US domiciled UK resident investors can avail themselves of the more favourable capital gains tax treatment on redemption of shares in such offshore funds. The UK tax rates are 18% and/or 28% on realised capital gains above the UK annual exempt amount. This compares favourably with similar rates of US capital gains tax. For US tax efficiency US 40 Act funds have to distribute at least 90% of their net investment income and short term gains and over time long term gains.

If such investors invest in other offshore funds say in Luxembourg or Dublin then they may face punitive rates of US tax circa 50% upwards on their investment income and gains unless the underlying fund is a Qualifying Electing Fund (QEF). The administrative cost of making such an election can be commercially unviable unless the fund has significant US investors. In practice many funds choose not to make a QEF. However, a US 40 Act Fund does not fall within the scope of QEF.

Therefore, it is recommended that US fund managers who want to market to US investors in the UK make an application to join the UK reporting fund regime. HMRC accept that US GAAP is of equivalent standard to IFRS and UK GAAP. The reported investment income from such funds is subject to UK income tax at the investor’s marginal rate of UK tax. Distributed net short term and long term gains by the fund are subject to the UK marginal rate of capital gains tax mentioned above.