US expats face a big tax bill

This article is part of
Guide to advising US expat clients

Furthermore, if the fund does not make any regular payments or 'distributions', as in paying interest or dividends, then the investor can fall into the trap of thinking they have not had any tax to pay until they cash in the fund and realise their gain.

This is actually not the case. Once the IRS catches up with the investor, it will look back over all the years when the fund made a gain and tax the fund, each year that the client has invested, at the default rate, which is currently 39.6 per cent. This year's gain will likely be taxed at the current rate of about 20 per cent.

The alternative to this is buying a US-compatible fund, but these may not be particularly available, or suitable on the investment side. A few are dual reporting, but again the choice is limited.

Ms Dromantaite explains: "You have to regularly report distributions to the IRS. If you don't regularly report distributions to the IRS you will be taxed at the higher rate."

The penalties for not planning ahead are severe, she adds.

"You have some people who give up 70 per cent or more to the IRS. They cash in now and they have to give it to the IRS," she notes.

"If it's a very rich person , I would say don't have long-term investments, have three-year funds."

Lessons learnt

The funds that are particularly affected are the less liquid ones, such as property and Indian infrastructure funds.

For more conventional funds, she says investors have to file returns each year, saying how much every fund gained each year. There will still be a tax charge but this is likely to be at the lower rate of 20 per cent to 28 per cent.

Another area that is problematic is the sale of property. In the UK, the sale of property that consists of one's main residence is not subject to capital gains tax; in the US it most likely is, as politician Boris Johnson found to his cost in 2014. 

His response was to ultimately give up his US citizenship - he had been born in the US when his parents lived out there. But the IRS would not have let him off the hook.

Similarly, this option may not be immediately available, or indeed desirable, and it does not do away with one's tax bill.

In addition, even if a client goes the whole hog and decides to give up their green card or passport, the US authorities are wise to it as being a way to escape future tax liabilities, and can refuse to allow someone to give up their status, making them potentially liable for paying tax to the IRS for another 10 years.