HMRC letter regarding savings account

James_B.

EdSwippet wrote: »

Not at all. It is an excellent illustration of how the statement that "rules are rules" does not and cannot justify bad rules in any context.

The rules seem fair enough in this case. A US citizen is required to pay US taxes on worldwide earnings.

Comparing having to pay income tax on earnings to suffering institutionalised racism is really quite distasteful.

I would prefer to pay a fair amount tax than what I am required to do in the UK, but I'm not going to compare my persecution at the hands of the authorities to that of Jesus...

James_B.

leonc888 wrote: »

She is totally unaware of anything to do with US only all her life


Regards to her passport she has renewed at the US embassy every time

Which is it, she's had nothing to do with them, or she's chosen, of her own free will, to renew her passport?

EdSwippet

James_B. wrote: »

Comparing having to pay income tax on earnings to suffering institutionalised racism is really quite distasteful.

Did you pick up on the fact that US citizens living in the UK have to pay US tax on top of their full UK tax? Even if they are also UK citizens.

There are a bunch of credits and deductions for US taxes that mitigate the worst double-taxation, but there are a lot of holes in this framework. US citizens get no tax benefit from ISAs. They have no capital gains tax allowance. They face problems holding SIPPs. They may have to pay capital gains tax in the US when they sell their home. They find it hard to be partners in any financial enterprise, because if they do then the non-US partnership will have to report to the IRS, something the non-US citizens in the partnership understandably do not desire. Trusts do not want to touch them. And post-FATCA some banks do not want to touch them either.

Taken together, these failures in credits and deductions force US citizens living in the UK to live a 'second class' financial existence. They are effectively barred from many normal financial and savings products, by US tax laws being applied extraterritorially.

The US confers citizenship automatically on anyone born there, whether they want it or not, and for life. It also confers it on anyone born abroad to a US citizen. Nobody chooses where they are born, or who their parents are.

Put these together and you have an enforced second-class participation in society, based on accident of birth. The parallels with segregation and apartheid are clear. The US no more deserves a free pass on this than did the old South African regime.

bowlhead99

Well, you certainly seem more passionate about the US seeking to get tax returns from its overseas citizens, than the US themselves have appeared to be about collecting them, historically.

I agree it would be a pain to be a US citizen who did not want to be one.

The US feels that the right of a citizen to keep all the benefits of being a US citizen is something that everyone would want and be willing to pay for, whether they are actually using the benefits of that citizenship to be US resident at that point in time or instead travelling internationally with the support and protection of US consulates overseas.

They teach the kids to pledge allegiance to the flag every day in the public schools and have a heck of a lot of patriots. USA! USA! Probably easy to instil that message when you're one of the richest and most powerful countries on the planet. Why wouldn't someone want to be a proud American!

Clearly if you don't want to play for Team America it is annoying to have to do tax returns to them because, as you say, you might end up paying more tax than your neighbour who was regular UK born and bred. And it can cause problems with partnerships if you need to get US tax calcs done and you're the only partner who needs it, it is probably going to cost you some cash as well as a headache. And the point about the CGT threshold on main residence being different for US residents and citizens who have two sets of rules to consider is also a factor for some.

However, one would assume that when you are at the stage that the prospect of these extra taxes become significant, if you didn't want them, you would consider the tradeoffs of keeping citizenship versus officially giving it up. This is why it is disingenuous and some would say insulting to compare it to an apartheid situation or something to do with civil rights for people who are perceived to have the wrong gender, sexuality, ethinc origin etc. Such classes cannot just give up those attributes while citizenship CAN be renounced.

Definitely, some more work could be done to educate people about their choices so that people didn't find themselves 'accidentally' breaking the rules imposed on their citizenship. And there could be a system of amnesties and 'letting you off' for those who genuinely didn't know they had done wrong. Maybe in some circumstances people could be let off their back taxes though it is hard to see how that wouldn't be abused - more likely they need to attempt to pay back taxes and have the penalties waived.

The problem for the US is that many people simply have no interest in learning about tax rules that affect them or anything to do with personal finance, so it must be exceptionally difficult for the US to disseminate information about what you are supposed to do if you are a US citizen abroad, when you they don't control all the popular media in all the countries in which a citizen may choose to go and live. Even if a message is thrown in someone's face, they may not have the mental capacity or inclination to find out how to go and pay more tax or how to go and pay an admin fee to renounce something. So, it is an uphill struggle for IRS. Which just comes back as an example of why most countries do not bother trying to collect from their own overseas citizens.

Still, on the subject of whether the US should be able to create rules that affect their citizens who travel overseas and take their US educations or other advantages obtained from being a US person and go settle somewhere else - we probably have to agree to disagree. I can see it's a right pain but this is not apartheid because if you don't like it, don't be a US citizen. I get that you can't help it at birth but you can help it later on if you know it is something to consider, and with all the financial institutions around the world knowing it is something to consider, the affected individuals will soon enough. So in 5 or so years this won't be a big surprise problem for anyone.

Perhaps mass renunciations and appeals will bring this to public consciousness around the world and the system will change. Perhaps not. In practice, as with anything, those with the least cash and resources will be the ones least prepared to deal with it. Some will still just make efforts to hide their US status when dealing with financial institutions and make a point of never visiting the US.

EdSwippet

bowlhead99 wrote: »

... citizenship CAN be renounced.

Yes, though I'd phrase it as 'freedom CAN be bought'.

The US will charge you $2,350. They may take capital gains taxes on anything you own that has an unrealized gain when measured in USD (even if not in your local currency), and remember, that includes your home. They may take full and immediate income tax on your retirement pot. And even afterwards, they may tax again at 40% any gifts or bequests you make out of post-tax money to a US citizen (perhaps your children or spouse) and for the entire rest of your life.

bowlhead99 wrote: »

Perhaps mass renunciations and appeals will bring this to public consciousness around the world and the system will change. Perhaps not. In practice, as with anything, those with the least cash and resources will be the ones least prepared to deal with it. Some will still just make efforts to hide their US status when dealing with financial institutions and make a point of never visiting the US.

That one. But it's sad that it comes to this. UK banks and brokers are starting to ask directly about whether a customer has US citizenship, and even in at least one case rejecting customers entirely based on birthplace in the US alone, so scope for hiding is limited. And in all honesty, who wants to live like that.

If you've time, you might want to read this recent report from Democrats Abroad on FATCA. It contains some good first-hand reports of the problems this ill-conceived law has produced. Remember while reading it that it comes from the party that brought us FATCA in the first place.

bowlhead99

EdSwippet wrote: »

And even afterwards, they may tax again at 40% any gifts or bequests you make out of post-tax money to a US citizen (perhaps your children or spouse) and for the entire rest of your life.

I don't claim to be an expert on US tax but are you saying that someone who is absolutely not a US citizen, having renounced and had it all signed off, still has to worry about paying US IHT or annual gift taxes as if they were a US citizen? Surely if the donor is not a US resident or citizen he doesn't have to worry about paying US estate taxes and gift taxes. On what grounds would the US still have their hooks into him? And for the recipient they might file an information return if they receive a huge gift, but gifts aren't taxable as income.

So that doesn't sound right or likely to be common. My suspicion is that some of this is being overblown by the media. However I'd be interested in whether I'm missing something.

Not that any of this helps the OP of course as we've somewhat strayed into politics.

EdSwippet

bowlhead99 wrote: »

... Surely if the donor is not a US resident or citizen he doesn't have to worry about paying US estate taxes and gift taxes. On what grounds would the US still have their hooks into him?

IRC section 2801. From this article:

"...under Section 2801(a), a U.S. citizen, resident or trust receiving a gift or devise from a covered expatriate is subject to an inheritance tax at the highest applicable gift or estate tax rate."

colsten

EdSwippet wrote: »

The US will charge you $2,350.

If this is a lot of money to you when you wish to escape any taxation by the US, you most likely wouldn't have to pay any tax in the US, anyway (see also double taxation agreement).

Otherwise, just cough up the tax or cough up the fee to renounce your citizenship. I don't see what the problem is.

bowlhead99

EdSwippet wrote: »

IRC section 2801. From this article:

"...under Section 2801(a), a U.S. citizen, resident or trust receiving a gift or devise from a covered expatriate is subject to an inheritance tax at the highest applicable gift or estate tax rate."

Thanks. I figured it had to be something that only applied in narrow circumstances, i.e. most will not be a covered expatriate. It's generally something that could catch high net worth people or those who hadn't done their taxes properly. So if you were paying on average over ~$150k of US income tax per year after deductions and foreign earned income tax credits, before expatriating, or if you had net worth of over $2m after doing your pre-expatriation gifting and tax planning, you might get caught by the covered expatriate thing.

So this is something that could be very relevant for a multimillionaire or someone on an outrageous fund manager salary, who's looking to assess their options. But Joe Sixpack in the 99.x % who decides to renounce is not going to be dealing with subsequent US tax obligations, once he's done it, and neither is someone who just happened to be born there and got out early.

As I acknowledged above it's definitely a tricky area and affects more people than it probably needs to, but while it's more of a headache than people would like it to be, a lot of the 'what's the worst that can happen' is not actually going to hit the common man.

EdSwippet

bowlhead99 wrote: »

Thanks. I figured it had to be something that only applied in narrow circumstances, i.e. most will not be a covered expatriate. It's generally something that could catch high net worth people or those who hadn't done their taxes properly. So if you were paying on average over ~$150k of US income tax per year after deductions and foreign earned income tax credits, before expatriating, or if you had net worth of over $2m after doing your pre-expatriation gifting and tax planning, you might get caught by the covered expatriate thing.

Current estimates (only estimates, because the US does not publish real numbers) are that around seven million people whom the US considers to be US citizens live outside the US. And there are around half a million US tax returns filed each year from overseas. There are likely a lot of people, then, who fall under "hadn't done their taxes properly".

bowlhead99 wrote: »

So this is something that could be very relevant for a multimillionaire or someone on an outrageous fund manager salary, who's looking to assess their options. But Joe Sixpack in the 99.x % who decides to renounce is not going to be dealing with subsequent US tax obligations, once he's done it, and neither is someone who just happened to be born there and got out early.

Own your home outright in the South East of England, and have pension savings accrued over a decent chunk of your working life, and you could easily reach the asset limit for the exit tax as a merely 'middle class' earner. This is yet another part of its insidious nature -- the older you are, and the more working life you have had, the larger a threat it becomes.

And... a bad law that might only affect a few people is still a bad law.

bowlhead99 wrote: »

As I acknowledged above it's definitely a tricky area and affects more people than it probably needs to, but while it's more of a headache than people would like it to be, a lot of the 'what's the worst that can happen' is not actually going to hit the common man.

The worst won't happen... yet, but the law is on the books. A decade or so ago the US made no serious attempt whatsoever to enforce its tax on citizens living outside the US. Now it is doing so.

Asset limits can be lowered or eliminated, exit tax application can be widened (it already covers green card holders, so one can 'expatriate' from the US without ever having been a US citizen in the first place!). It is only a matter of time before the worst does happen.

The clear message to US expats, one that many are heeding, is to renounce US citizenship now, and before congress makes things even worse.

Finally, bear in mind that every pound extracted by the US from US citizens living in the UK is a pound less in the UK economy. And every pound paid in compliance costs by UK banks and brokers to prop up this bad law is taken from your, my, and every other UK resident's retirement savings.