The splitting of capital and income can also be an issue where the individual is resident in the UK but US-domiciled and they want to remit assets to the UK.
The transfer into the UK of so-called ‘mixed funds’ or ‘dirty capital’ can have negative tax consequences and, again, can result in costly fees to tax advisers to unravel.
There can also be challenges with tax-efficient vehicles in the UK not being recognised in the US, such as Isas.
Pensions should also be looked at carefully.
We are not tax advisers and always work closely with a client’s tax adviser to plan in advance of making investments.
Reporting challenges
Reporting for US clients is more complicated and time-consuming as well.
Most UK residents have little problem getting information on their holdings, income and capital gains for HMRC.
But trying to provide reports that are compliant with both UK and US tax laws throws up multiple challenges.
For one, UK and US tax years are out of sync – the US goes by the calendar year, while the UK runs from April to April.
The IRS requires each transaction to be captured in the relative dollar equivalents at the point of completion.
Complicating matters further, the US authorities measure capital gains differently.
In the US, anything held for less than 12 months is a short-term gain and taxed as income. In the UK there is no distinction.
Capital gains are also calculated using different methods.
The UK uses average cost for the book cost in most cases. For the US, ‘first in, first out’ is usually the method used.
This can make capital gains calculations drastically more difficult, particularly if there has been a reasonably long period between buys and values have fluctuated.
Care must be taken on tax credits too.
What this means for advisers and their clients
If citizenship comes at such a premium, why not suggest clients renounce it?
Some do, but it is a long, drawn-out and costly process that can involve paying for legal advice in both countries, requires proof of five years of IRS tax compliance and can incur exit taxes.
It costs $2,350 (£1,883) just to hand in a passport.
Of course, there can be benefits to American citizenship, and renunciation is irrevocable.
As a consequence, many just accept that there is no way around the situation.
Adviser solution
There is no way to avoid the fact that advising an American can be a complex and time-consuming task.
But once advisers have a better understanding of how the regimes fit together and where the conflicts lie, there is an excellent opportunity for them in the pool of potential clients. It is best done with help.
The adviser should look for an investment manager that can build a portfolio that does not breach the PFIC rules.
