US – UK Bilateral Tax Agreement - Implication for US Expats
During recent months we’ve been keeping our readers updated on international measures being taken by the IRS, Department of Treasury, and the Department of Justice to track down non-compliant US Expats and hold them accountable for their foreign income tax and foreign financial account reporting obligations. The United Kingdom is among the list of countries with which the United States has recently established new bilateral tax agreements that would enable the US to enforce FATCA (Foreign Accounts Tax Compliance Act) requirements worldwide. This article takes a look at the types of foreign financial accounts the UK will be required to report and the information to be shared with the United States.
Reporting Requirements of UK Financial Institutions
Basically, the exchange agreement between the United States and the United Kingdom stipulates that Reporting UK Financial Institutions will not be subject to tax withholding under FATCA regulations if they are compliant with all information sharing and withholding obligations on US Citizens and Green Card Holders and Non-Reporting UK Financial Institutions. Reporting UK Financial Institutions will be required to:
- Report all qualifying US accounts to HMRC (UK’s Tax Authority) as outlined in the bilateral tax agreement;
- Withhold 30% of qualifying payments to Non-Reporting UK Financial Institutions which are classified as a QI (Qualified Intermediary), a WFP (Withholding Foreign Partnership), or a WFT (Withholding Foreign Trust);
- Notify Reporting UK Financial Institutions that do not qualify as a QI, WFP, or WFT of their tax obligations on US source withholding payments;
- Begin reporting the names of every Non-Reporting UK Financial Institution to which reportable payments have been issued along with the amounts of said payments in 2015; and
- Meet all registration requirements in designated Partner Jurisdictions.
For now, Reporting UK Financial Institutions who consistently meet these obligations will be exempt from FATCA withholding. Even if all these obligations are not met, qualifying financial institutions can still escape FATCA withholding until they have been officially identified as a Non-Reporting UK Financial Institution as defined in the Bilateral Tax Agreement.
Reporting Requirements of UK Government
The terms of the recently signed Bilateral Tax Agreement between the United States and the United Kingdom will continue to unfold over the course of the next few years. In 2013 and 2014, the UK Government will be required to share the following information with the Internal Revenue Service:
- The name, address, and US ITIN (Individual Tax Identification Number) or Social Security Number of every US account holder,
- The name, address, and US ITIN (Individual Tax Identification Number) or Social Security Number of any US Citizen or Green Card Holder acting as a Controlling Person of a foreign financial account for a Non-US Person or Institution,
- The account number of each account held by a US Citizen or Green Card Holder, and
- Each US Citizen or Green Card Holder’s year-end account balance.
For UK compliance in 2013, the above information must have been shared with the United States before September 30, 2015. For all other years, obligations will need to have been met by September 30 of the year following the reportable tax year. Beginning in 2015, the UK Government will also be required to share the aforementioned list of account details in addition to the following information:
- Gross income generated by and aggregate gross property sale or redemption proceeds credited or paid to a foreign Custodial Account,
- Total amount of interest earned on a foreign Depository Account, and
- Any other proceeds or income derived from reportable foreign financial accounts held by US Citizens or Green Card Holders.
Tax Agreement: Non Reportable Foreign Financial Accounts
Although the bulk of the Bilateral Tax Agreement between the United Kingdom and the United States makes tax exempt allowances for Reporting UK Financial Institutions, it also offers a tax-exempt status to a variety of Non-Reporting UK Financial Institutions. Qualifying institutions include UK Government Institutions, non-profit organizations, and certain UK specific financial institutions with no foreign offices (referred to as Institutions with Local Base). In order for Financial Institutions with a Local Base to be extended tax exempt status, they must meet certain UK reporting or withholding requirements mandated by HMRC, be willing to refuse account services to certain US Persons, and maintain a clientele base consisting of at least 98% UK or EU customers.
In addition to certain UK Institutions that will be exempt from FATCA withholding and/or reporting obligations, certain types of accounts setup and maintained in UK Financial institutions will also qualify as ‘non-reportable’. These types of accounts include:
- Qualifying Pension Plans with an annual contribution cap of £50K and a payout restriction preventing distributions until the age of 55 or at the time of severe health complications,
- Pension Plans which were set up through HMRC under allowances made in Part 4 of the Finance Act of 2004,
- Individual and Junior Individual Savings Accounts,
- Adolescent Trust Funds,
- Fixed Interest and Index Linked Savings Certificates,
- Tax Exempt Savings Plans,
- Premium Bonds,
- Profit Sharing and Incentive Plans, and
- UK Employer Stock Options.
Now or Never
If you’re among the populace of American Expats who have been escaping US tax liability under the veil of international borders in the United Kingdom, your luck is quickly running out. If you have not filed a US expat tax return in one or more years or if you have reportable financial accounts in the United Kingdom that have not been reported to the Department of Treasury, this will be your last chance to come clean and meet your tax and reporting obligations before the United States identifies and pursues you.
If you need help getting current on your US tax obligations by filing back taxes or reporting late FBARs, make sure to contact an international tax professional at Taxes for Expats to help get you back on track. To read more about the Bilateral Tax Agreement between the United States and the United Kingdom, there is aPDF document on the Treasury Website.