Praemium eyes expansion of Fatca-compliant offering

Many firms and financial institutions have been turning US citizens away due to reporting burden

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Any American citizen living abroad faces issues regarding their tax returnsl; as the US, together with Eritrea, are the only two countries in the world with a citizenship-based taxation system as opposed to a residence-based one.

The repercussions of the Foreign Account Tax Compliance Act (Facta) are multiple, including requiring Americans abroad to disclose their foreign income and pay taxes to the Internal Revenue Service (IRS), and the same applies to their foreign financial institutions.

Many banks and financial services firms have started turning people away because of the reporting compliance they have to file with the IRS.

Even US-based companies with operations abroad have started doing so. Last year, International Adviser revealed that Goldman Sachs’ UK savings portal Marcus by Goldman Sachs did not let US citizens living in the UK open accounts due to issues complying with Fatca.

Under-served segment 

But Nadine Irons, international sales manager at platform Praemium, believes that technology could solve the problem.

The platform has been running an offering for US expats in line with Fatca standards since 2013.

“US citizens often find it difficult to hold their legitimate assets outside the US,” Irons told International Adviser. “We have found many firms are reluctant to serve persons with a US connection because of a very high compliance and reporting burden for everyone involved; including investors, custodians and advisers.

“We find that this market is traditionally quite under-served due to the complexity around the reporting on an ongoing basis.”

US citizens overseas have a very restricted pool of investment options to choose from, Irons explained, which need to be approved by the Securities and Exchange Commission (SEC).

“The [Praemium] US service enables financial advisers to give their clients access to SEC-regulated investment managers and their managed portfolio services (MPS),” Irons continued.

“The SEC-regulated investment managers we work with are Waverton Investment Management, LGT Vetsra US and Dunhill Financial. All run their risk rated MPS solutions in a range of currencies via the Praemium platform.”

Investment options 

The three firms offer a collection of direct equities, corporate bonds, ETFs and mutual funds through their MPSs, Irons explained.

The investments are not penalised by the US tax code.

There are some US-registered mutual funds and ETFs that have been granted UK ‘reporting fund’ status, which can be accessed by US citizens.

“UK funds are classified and taxed as passive foreign investment companies (PFICs) by the US tax authorities,” Irons said. “PFICs are subject to special, highly punitive tax treatment by the US tax code. As such, you tend to see investments for US citizens being predominately invested in direct equities/bonds.”

Access to SEC-approved investments can be done via the Praemium Managed Accounts Platform, “which enables advice businesses to outsource the investment portfolio management of domestic and international portfolios,” she added.

Future expansion 

Last year, Praemium partnered with Dunhill Financial and The Fry Group, and going forward, the platform is looking to grow those partnership even further, Irons revealed.

“We will be expanding on those relationships that we already have in place. We are also working with a number of new advisers and investment managers to continue to build on our offering for current and new clients, and also to broaden our reach into different areas of the market, globally.

“We will be partnering with the US managers we work with and trying to do a lot more promotion of this service, there must be thousands of unserved Americans living in the UK that just don’t know how to invest their money in US-compliant investments,” she added.

Irons said that the biggest concentration of US expats whose advisers are on the Praemium platform is currently the UK.

“I think because it’s quite a niche area, there aren’t a lot of advisers dealing with US citizens, but that said, there are some advisers in the UK who specialise in advising US citizens and understand the complexities of investing for these clients.

“We do also have US adviser firms that use our platform to service their clients who have UK-based investments – these are usually investments in a Sipp for US citizens who have previously worked in the UK and returned to the US, or UK nationals who have moved to the US,” she explained.

Overcoming hurdles 

But what do those Fatca-related complexities actually entail?

The main one has to be the tax reporting, Irons said.

“Not only do you have complexities around the investments within the portfolio, you have the complexities of the tax reporting, and Praemium technology has built a very well versed and a comprehensive report that is sent to investors and advisers on an annual basis.

“We also report directly to the IRS ongoing with both 1099 and 1042 reports; the withholding tax is deducted directly from the investor’s portfolio and paid to the IRS on a monthly basis.

“We take care of all the administration and we take care of the headaches that advisers don’t want to be dealing with. We feel that’s why a lot of firms have steered clear of any clients with US connections to date – because of the complexities.”

On top of the MPS, Praemium has an Expat Retirement Account which is able to accept US citizens.

Giving up the blue passport 

Many US expats have felt forced to, or have been considering, renouncing their American citizenship to get out of the Fatca net.

But what would happen to clients on the Praemium platform who opt for this path?

Irons said: “Renouncing citizenship can be an incredibly onerous task for US citizens,” describing it as “quite sticky”.

“Any US citizen who was lived in the US within the past five years, automatically passes that citizenship to their children, their offspring.

“Renouncing that citizenship can be a really complex procedure. Lots of forms, navigating complex tax laws, filing ongoing tax returns and paying outstanding tax and fees.

“If a client was using our solution, then there’s no reason they couldn’t continue to hold those same investments after renouncing citizenship.

“They are just in a portfolio of direct equities and bonds, so, if they do go down the route of renouncing citizenship, we would simply then get them to self-certify with an IRS tax form called a W8BEN, which is basically saying that they have no US tax connections and from that point, we turn off the reporting to the IRS and the portfolio remains as is,” she added.

And for those waiving their citizenship that would also mean being allowed to access a wider range of investments, without being tied to the ones approved by the SEC.

“That opens them up to a wider range of investment choices, and again, we would make sure that they are liaising with their investment adviser to get the correct advice as to what would then be most suitable for them as investments now they are not ‘US citizens’.”