‘Beware of tax toxic funds’ Advisers are at risk of being sued by American clients if they fail to navigate the US government’s tax maze,

Iona Bane for FT Adviser writes: The associate director of private clients for London & Capital said mutual funds and other pooled investments that are not registered in the US have been rendered “tax toxic” for American expats under the recently established Foreign Account Tax Compliance Act.

He said: “The kind of routine investments that UK advisers like are deemed passive foreign investment companies under the US tax code, which are subject to hugely punitive tax rates and onerous reporting duties. They are the worst possible option for American expats, and many British advisers simply don’t realise this.”

Mr Kosky explained that British financial institutions have to report all US clients to the country’s internal revenue service, due to the new Fatca legislation, with the danger that investments by passive foreign investment companies would be quickly uncovered.

He added: “Many advisers think it simply isn’t worth their while to take on American clients as a result.”

Speaking at a seminar on advice for US expats last week, Tony McLoughlin, investment director at London & Capital, said: “The US tax code means that the whole aspect of compliance is as important as our investment strategy.”

Sam Instone, director of London-based AES international, said: “The USA has one of the most difficult tax systems for expats around, but millions come to the UK every year and the rules on how they should file taxes is very clear. A huge number will need financial advice and there’s no good reason to avoid this market. It requires specialist knowledge but US-compliant products are available.”