The US fund tax clampdown
The US Senate has passed a new law which could result in millions of UK investors having to make a declaration to US tax authorities.
By passing the Foreign Account Tax Compliance Act (Fatca), the Senate is forcing UK and other non-US resident investors to make a declaration to the US Internal Revenue Services (IRS) or face tax penalties on any US fund holdings.
Fatca is due to come into force on 1st January 2013 and will mean investors will need to sign a statement swearing they owe no tax to the IRS on any funds they have which hold US assets.
These new rules potentially pose an administrative nightmare for fund managers and insurance companies.
We suspect that most fund managers are unaware of whether their investors are US citizens. They will therefore need to approach each investor individually and get them to sign a declaration.
If they fail to do this, it seems likely that the IRS will levy a 30% withholding tax charge on their funds.
The Association of British Insurers (ABI) has already raised the issue of data protection, with EU data protection laws preventing UK investment houses from passing information about US citizens investing in their funds to the US tax authorities.
Due to their close relationships with clients, Independent Financial Advisers will know whether their clients are US citizens and therefore subject to US taxes on their holdings.
We suspect that banks and discretionary fund managers will have a harder time due to their typically arms length relationships with clients, leading to the burden of extra administrative costs falling on these types of wealth managers.
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