The seminar, held at the offices of wealth managers London & Capital, was conceived to help an audience of advisers better understand the unique challenges of looking after clients with US “links” – such as having been born in the US but working in the UK now, or having been born in the UK but retiring to Florida.
Anyone who did not already know that advising Americans or “UK-linked” non-Americans with non-US assets can be a complicated business would have left London & Capital this morning well aware of it indeed.
Qualifying recognised overseas pension schemes administered in Malta emerged as one of the best bets for many – but crucially, not all – such US-linked individuals who were looking for an alternative to leaving their pension in Britain, as a result of a key double-tax treaty signed between the US and Malta in 2011.
Conventional, non-US-registered funds, ETFs and similar entities held inside Self-Invested Personal Pensions (SIPPs), on the other hand, carry with them the potential for what London & Capital director Tony McLoughlin called “toxic tax treatment” by the US Internal Revenue Service, when they are ultimately sold.
“These are often referred to as Pfics, or passive foreign investment companies,” McLoughlin explained, and the difficulty for Americans who have them comes when the US tax authorities “look through the pension at the underlying investments”.
This is because the the US regards such funds as “foreign”, thus assigning them to tax-inefficient treatment as Pfics, McLoughlin said.
However, “if the portfolio was organised to invest in individual stocks, equities and individual bonds, these would be compliant for US purposes, [while] exchange traded funds [would be] taxed like common stock, and therefore, only taxed on the income, interest or proceeds”.
McLoughlin said the job of identifying Pfic investments in non-US-administered investment products held by Americans had been made easierfor the US tax authorities in recent years as a result of the US having increased the reporting requirements for them – for example, with the introduction of Reports of Foreign Bank and Financial Accounts (FBARs) and Statements of Specified Foreign Assets, known also as form 8938s.
The good news, he concluded, is that although the tax charge on the gain an individual might make in a Pfic, when added to the interest that is also charged on the basis of how long the Pfic was held, might be “penal”, at least “the tax and interest can never exceed 100%”.
The QROPS alternative
James Barber-Lomax, the head of Jersey-based trust company Dominion’s new business team for the company’s new Malta-administered QROPS, explained how a QROP scheme might be a better vehicle for a US-linked individual with a UK pension he or she is seeking to transfer, at least since the signing of the DTA between the US and Malta.
But he stressed that these schemes were not to be thought of by advisers or their clients as "tax evasion schemes”, as they were intended to provide a pension for their beneficiaries, and that those considering them for their clients needed to to be well advised, to avoid potentially costly oversights.
Such oversights, according to Barber-Lomax, included not realising that a transfer from a SIPP to a QROPS “is not tax free” if the holder of the pension is a US person living in the UK, “unless he or she has a lot of tax credits” to use up.
