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Federal excess

As I sit here reading Best Advice (Money Marketing, August 5) it reminds me that many IFAs are innocently overlooking significant US tax problems when advising clients who work, live or own property in the US.

If an individual spends most of the year in the US, they will inevitably become tax resident there. Broadly speaking, an individual becomes resident in the US for tax purposes on spending 183 days there in a single calendar year or if the current year days plus one-third of the preceding year days and one-sixth of the second preceding year days total 183 days.

It may be possible to argue non-residence, however, either under US domestic rules if the individual has closer connections with the UK or under the US/UK tax treaty if the individual is treaty resident in the UK.

However, should an individual nonetheless find themselves resident in the US, they would become taxable on worldwide income and gains. These include penal rules relating to what are known as passive foreign investment companies. These include all UK collective investment schemes and lead to an automatic minimum rate of tax on gains of 35 per cent, plus an interest charge which could exceed 100 per cent of the gain. Sadly, Isas, Peps, Tessas and National Savings are not effective for US tax purposes.

In addition to federal taxes, state tax may be payable and the US has an estate and gift tax regime, all of which may need further advice.

The net result when advising anybody who might mention wanting to live in the US is to get specialist tax advice right at the start of the relationship to avoid problems that could have been eliminated in advance.

David Treitel

Senior manager,

Buzzacott Livingstone, London EC4


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