Draconian legislation enacted in America — and aimed solely at helping American authorities collect tax from their overseas citizens — is translating into bills of hundreds of pounds for ordinary British families.
The total cost to British businesses and individuals of abiding by the new US laws, which became effective here only last month, is put at £1bn. Most people will pay unknowingly through higher fees for their investments, banking and other services. But for some families the costs are more explicit. And the invoices are starting to land on their doormats.
The law, the “Foreign Account Tax Compliant Act” (or FATCA) was passed by US Congress in 2010, but it only applied in Britain from July 1. It requires financial institutions to undertake reviews on customers’ tax residency details, or face a 30pc penalty on their US operations. Since most large financial organisations operating in Britain are global, they have no choice but to comply — whatever the cost.
Some individual customers are being contacted by their banks or other financial providers if, for example, they appear to have links with the US or own property there. But tens of thousands of other families are beginning to receive letters, and invoices, simply because they have established run-of-the-mill family trusts.
The first Charles and Margaret Stewart knew about FATCA was when, earlier this month, a letter arrived from their accountant, Grant Thornton, warning that a “review” was required into a trust they had established for their daughter in 2004. The letter said: “There are certain steps you need to take. The starting point will be to carry out a detailed review...” It estimated the initial costs would be £350 plus VAT, possibly more, “based upon the time spent on the matter”.
The Stewarts established the trust 10 years ago to buy a property for their adult, dependant daughter, in order to safeguard the property as her home for as long as she needs to live there. The property, near Charles’ and Margaret’s own home in Leicestershire, generates no income. None of Mr Stewart, 74, pictured, his wife Margaret, or their daughter has any US connections.
Although it was established for wholly innocent reasons, this trust along with an estimated 100,000 others now falls within the far-reaching scope of FATCA.
Once the review is undertaken, if the accountant is satisfied the trust does not need to fulfil any further obligations under FATCA, there are no further costs — and no information will be passed on to HMRC or the American authorities. “This whole process seems extraordinary,” said Mr Stewart. “The trust just has a property inside that is not providing any income so I don’t understand why it needs to be reviewed, simply to satisfy regulation introduced by another country.”
In its letter, Grant Thornton is mildly apologetic, saying it “regrets having to write about new compliance requirements and related costs” but adds “this is something that will have to be dealt with.”
It is not alone as other accountancy firms are also carrying out reviews and are charging for their services, with “initial review” fees ranging from £200 to £500. Although most high-profile firms refuse to publicly criticise FATCA, in private they condemn the measures as “indiscriminate” and “blunt”.
Gary Heynes, a tax partner at rival accountant Baker Tilly, said the firm had started mailing affected clients over the past week. Mr Heynes said: “It is extraordinary that a trust with no US assets and no US beneficiaries can be subject to these US reporting requirements and need to be reviewed.”
Ronnie Ludwig, of accountancy firm Saffery Champness, said: “These US regulations are a complete nightmare for trustees to get their heads around. We will be spending a lot of our time reviewing each of our client’s trusts between now and the end of October.”
The October deadline is the point by which accountants and other firms must identify which of their clients, if any, need to provide the authorities with more information. No firm was prepared to comment on what would happen if customers refused to comply. A spokesman for Grant Thornton said: “The fees charged represent the time and resources we allocate to reviewing individual trusts and their particular circumstances. These will vary accordingly, dependent on the nature of requirements which apply.”
Who is affected, and how?
Britons whose bank or other accounts suggest a financial relationships with the US — such as regular payments to US companies or individuals — can expect to hear from their bank, investment broker or other firm under the provisions of the new FATCA regulations (see main report). You shouldn’t have to pay: you will just need to provide information. This may be passed on, eventually, to the American authorities.
It is different for those people who have set up trusts. They will be contacted irrespective of whether there is any suggestion of a US connection and, as with the Stewart family, they may have to pay their accountant to undertake a review. About 100,000 trusts could be affected including those set up to look after children’s assets or reduce inheritance tax.
The purpose of FATCA is to put the onus on the world’s big finance firms to check whether any of their customers are dodging tax owed in the US. If firms don’t oblige, their US operations will be hit with a 30pc tax. The UK divisions of firms have hastily complied — at customers’ expense.
- The best of Telegraph Money once a week
Our weekly newsletter has our very best ideas on loopholes, investments ideas and saving money. Just click here and enter your email
