International Americans: the benefits of "offshoring"

US elections are disruptive events even without the backdrop of a global pandemic and severe economic contraction. The outcome of the 2020 vote still remains uncertain. A divided Congress and a continuation of gridlock around a fiscal package to support the Covid-stricken economy. What are the implications for long-term investors?

Focusing on jurisdictional risk

National events such as elections focus investors’ minds on risk, in particular the risk of holding assets within a single jurisdiction. While we live in a globalised world, with economic performance often synchronised around the major regions, individual countries and blocs continue to exercise autonomy over their tax and other legislative affairs.

History shows that actions taken by individual governments can adversely impact the wealth of their citizens. Capital controls, for instance, have been implemented over the years by many countries seeking to stem the movement of privately-owned assets. Countries frequently seek to control trade in foreign currencies. US history has one notable example of interference in the affairs of private investors: the 1933 Executive Order 6102 made it a criminal offence for American citizens to own gold bullion – a prohibition that was only relaxed in the 1960s.  

In the face of theses risks, some internationally-minded investors choose to “offshore” a portion of their assets, spreading their total wealth across more than one jurisdiction. Investments held offshore are subject to another country’s law, and potentially removed from the domestic source of economic or political uncertainty. If an investor’s home country takes any step which is detrimental to investors, not all of their wealth is affected.

Offshoring assets? Tax isn’t the reason

The decision to offshore assets is not likely to be driven by tax. In recent years many countries have tightened their tax regimes, partly in response to any increasingly mobile taxpayer base.

The US tax system is very unusual in that it seeks to tax its citizens’ wealth wherever it is held.

The introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010 dramatically tightened the process of pursuing tax arising from funds held offshore. When it was introduced, Americans were already required to report their worldwide income to the US’s Internal Revenue Service. But FATCA was an entirely new step in that it obliged financial institutions in other countries to report on their American customers’ holdings.

Intended to help the IRS hunt down hidden assets overseas, FATCA had another unexpected effect: it caused many financial institutions outside of the US to stop offering services to American clients. It was simpler and cheaper to turn away American customers than to meet – or risk failing to meet – FATCA’s onerous reporting requirements. This meant international Americans suddenly found it more difficult to find wealth managers and other investment firms to meet their offshore needs.

Few institutions are well-placed to help

While many financial institutions have removed services available to US citizens (or “US persons” – as those with US financial reporting requirements are technically known), a small number of global businesses went in the opposite direction. They invested in the expertise required to offer excellent, compliant services to that specific group.

The trend has been of benefit to wealthy, internationally-minded US citizens. It has resulted in a highly specific knowledge base developing in the world’s non-US financial centres, including London, devoted to giving US investors exceptional advice based on the latest US legislation. Schroders Wealth Management US Limited – based in London but with a US SEC licence – is one of those few businesses.

Why choose a London-based wealth manager?

The UK is undergoing its own political change as it exits from the European Union. But London has been a global centre of financial services for centuries and will continue to be one, operating as it does within the embrace of a legal system second to none in terms of its security and the confidence it inspires. London’s other advantages, of course, are its historic cultural links with the US including its shared language, and its geographic position as the gateway to Europe.

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