FATCA and its impact on US expats with UK business interests

The Foreign Account Tax Compliance Act (FATCA) has had a significant impact on the financial responsibilities of US citizens living abroad, particularly those with business interests in the UK.

FATCA was enacted to combat tax evasion and imposes extensive reporting require­ments on both individuals and foreign financial insti­tu­tions.

What is FATCA?

FATCA is a US federal law enacted in 2010 as part of the Hiring Incen­tives to Restore Employment (HIRE) Act. Their main goal is to prevent tax evasion by U.S. taxpayers using foreign accounts and invest­ments.

Main goals

• FATCA requires foreign financial insti­tu­tions (FFIs) to disclose infor­mation about financial accounts of U.S. citizens.
• It requires U.S. taxpayers who have certain foreign financial assets to report them annually to the Internal Revenue Service (IRS).
• By expanding disclosure, FATCA aims to identify and prevent tax avoidance strategies associated with offshore accounts.

FATCA reporting requirements for US expats

For US expats with business interests in the UK, FATCA adds another layer of complexity to tax compliance.

Individual reporting requirements

Report thresholds

The reporting thresholds vary depending on regis­tration status and place of residence:

• Single people living abroad:

Year-end balance: $200,000

Any time of the year: $300,000

• Marriage with shared residence abroad:

Year-end balance: $400,000

Any time of the year: $600,000

Forms to submit

To comply with FATCA, US expats must submit certain forms, often according to one Tax advice to ensure accuracy:

• Form 8938 (Statement of Specified Foreign Financial Assets):

Filed with your annual tax return.

Reports details of foreign financial assets, such as bank accounts, investment accounts, and ownership of foreign companies.

FBAR (FinCEN Form 114):

Required if the total value of foreign financial accounts exceeds $10,000 at any time during the calendar year.

Submitted electron­i­cally via the Financial Crimes Enforcement Network (FinCEN).

Impact on US expats with UK business interests

Double taxation obligations

US taxation of world income

• The United States taxes the worldwide income of its citizens, regardless of where they live. This means that income from UK business interests must be reported to the IRS.
• Profits, dividends and other income from UK companies are subject to US taxation and must be reported on the expatri­ate’s US tax return.

UK tax oblig­a­tions

• The UK taxes individuals based on their residency status. If you are a UK resident you will be subject to UK tax on your worldwide income.
• UK companies are subject to UK corporate tax laws, which may differ signif­i­cantly from US regula­tions.

Allevi­ation of double taxation

• The US-UK treaty helps prevent double taxation by allowing tax credits and exemp­tions. It deter­mines which country has the right to tax certain types of income.
• US expats can claim a credit for income taxes paid to the UK, reducing their US tax liability.
• The foreign earned income exclusion allows qualified individuals to exclude a certain amount of foreign earned income from U.S. taxation.

Possible penalties

Failure to comply with FATCA can result in severe penalties.

• Failure to File Form 8938: Penalties start at $10,000, with an additional $10,000 for every 30 days of failure to file after notifi­cation by the IRS, up to a maximum of $50,000.
• Accuracy-Based Penalties: A 40% penalty may be imposed for under­payment of taxes attrib­utable to undis­closed foreign financial assets.
• Willful Failure to Report: Willful failure to report may result in criminal penalties, including fines of up to $250,000 and impris­onment.
• Tax evasion allega­tions: Concealing assets or income can lead to criminal prose­cution for tax evasion.
• For Foreign Payments: A 30% withholding tax may be imposed on certain U.S. source payments to non-compliant individuals or entities.
• Increased scrutiny: Non-compliance can trigger audits and inves­ti­ga­tions that can damage personal and profes­sional reputation.
• Business disruption: Legal issues and fines can disrupt business opera­tions and strain resources.

Mitigate the impact of FATCA

Tax planning strategies

Proper tax planning is critical to minimizing the impact of FATCA and maximizing the benefits available under both US and UK tax laws.

Foreign Earned Income Exclusion (FEIE)

The FEIE allows qualified U.S. expats to exclude up to $112,000 (for 2022) of foreign earned income from U.S. taxation. This exclusion can be an effective tool for those who have signif­icant income from UK sources.

To qualify, expats must pass the bona fide residency test or the physical presence test. Proper documen­tation is essential to prove eligi­bility.

Exclusion of expatriate accom­mo­dation

US expats can exclude certain overseas housing costs from their income, including rent, utilities and insurance. The exclusion is in addition to the FEIE and can signif­i­cantly reduce taxable income.

For expats living in expensive cities like London, excluding housing abroad can mean a signif­icant tax break.

Foreign Tax Credit (FTC)

The FTC allows expats to claim a dollar-for-dollar credit for foreign taxes paid to the UK, thereby reducing their US tax liability. This credit is partic­u­larly useful if income is taxed at a higher rate in the UK than in the US.

The FTC has limita­tions and may not be able to fully offset U.S. taxes in all cases. However, unused credits can often be carried forward to future tax years.

Plan your retirement

Tax treatment of UK pensions

The tax treatment of UK pensions, such as self-invested personal pensions (SIPPs) and workplace pensions, can be complex under US tax law. Contri­bu­tions, growth and distri­b­u­tions may have different tax impli­ca­tions.

The US-UK tax treaty provides special provi­sions for the taxation of pensions, which often allow for tax deferral similar to qualified US retirement accounts.

Roth IRAs and ISAs

While Roth IRAs provide tax-free growth under US law, their treatment may be different under UK tax law. Conversely, Individual Savings Accounts (ISAs) are tax-free in the UK but taxable in the US.

Social security contracts

The US-UK Total­ization Agreement prevents double taxation of Social Security and helps determine eligi­bility for benefits.

Conclusion

FATCA presents signif­icant challenges for US expats with business interests in the UK, but with strategic planning it is possible to effec­tively manage these complex­ities. By lever­aging tax treaties, taking advantage of appro­priate exclu­sions and credits, and engaging in proactive retirement and estate planning, expats can mitigate the impact of FATCA and optimize their financial outcomes.

Under­standing the impli­ca­tions of FATCA is critical not only to ensuring compliance, but also to making informed decisions that comply with both US and UK tax laws.

Working with experi­enced tax and legal profes­sionals, staying abreast of regulatory changes, and regularly reviewing financial strategies are important steps to success­fully managing your global tax respon­si­bil­ities.