US Citizens Living in the UK: FATCA, FBAR, and Reporting Requirements

As a US citizen residing in the United Kingdom, navigating tax obligations can be complex, particularly with the stringent reporting requirements set forth by the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR). On top of FATCA and FinCEN reporting requirements the US imposes a multitude of additional compliance requirements on its international citizens. The below article looks to provide clarity on some of these filings and we always recommend consulting your tax advisor to establish any additional filings required:

What is FATCA?

FATCA, enacted in 2010, mandates that US citizens and certain foreign entities report their foreign financial accounts and assets to the Internal Revenue Service (IRS). The aim is to combat tax evasion by US persons holding assets outside the United States. Under FATCA, foreign financial institutions (FFIs) are also required to report information about financial accounts held by US citizens.

FBAR: Report of Foreign Bank and Financial Accounts

The FBAR, formally known as FinCEN Form 114, must be filed by US citizens and residents who have a financial interest in, or signature authority over, foreign accounts with an aggregate value exceeding $10,000 at any time during the calendar year. This includes bank accounts, brokerage accounts, trusts, and other types of foreign financial accounts. Key points about FBAR:

• The FBAR must be filed electronically through the Financial Crimes Enforcement Network (FinCEN) website, or by a tax advisor.
• The deadline for filing is April 15, with an automatic extension to October 15 available.
• Failure to file an FBAR can result in significant penalties, including fines that can reach up to $16,356 (for tax year 2025) for non-wilful violations and even greater penalties for wilful violations. Furthermore, FBAR penalties increase annually with inflation.

Form 8938: Statement of Specified Foreign Financial Assets

Form 8938 is specifically for US citizens and resident aliens who must report specified foreign financial assets if the total value exceeds certain thresholds. The thresholds vary depending on whether the taxpayer is living in the US or abroad. For individuals residing outside the US the Form 8938 reporting thresholds are as follows:

• You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
• You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Key Reporting Aspects:

• Form 8938 must be filed with your annual income tax return.
• Largely the same financial accounts that require FBAR reporting may necessitate Form 8938 reporting, but the forms are separate and serve different purposes.
• In addition to financial accounts, shareholdings and interests in other foreign financial assets must be included.
• The penalty for failing to file Form 8938 is $10,000.

Form 5471: Information Return of US Persons With Respect to Certain Foreign Corporations

Form 5471 is required for US persons who are officers, directors, or shareholders in certain foreign corporations. This form provides the IRS with information regarding the foreign corporation’s activities, income, and other financial details. The Form 5471 effectively translates the activity of the foreign corporation into US GAAP and stress tests the income for certain anti-deferral regimes within the IRC. Key reporting aspects

• US citizens who control a foreign corporation (typically defined as owning greater than 50% of the stock) must file Form 5471.
• Ownership of various family members is attributed to US shareholders for reporting purposes triggering additional filing requirements.
• Shareholders who acquire or dispose of ownership, including those who have a less than 50% ownership are generally subject to additional filing requirements.
• There are different categories under which a filer may fall, each with its own set of requirements.
• Failing to file Form 5471 can result in substantial penalties, including a $10,000 penalty per form for failure to file and additional penalties for continuing non-compliance.

Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Form 8621 is pertinent for US citizens or residents who are shareholders in Passive Foreign Investment Companies (PFICs). A PFIC is generally defined as a foreign corporation that meets either an income or asset test:

• Income test: if 75% or more of the gross income of the foreign corporation is passive, then it will be treated as a PFIC.
• Asset test: if 50% or more of the assets of the foreign corporation produce passive income, then it will also be treated as a PFIC.

It should be noted that many common investment products outside the US such as ETFs, mutual funds, wrappers and investment companies as considered to be PFICs. Similarly, common investment structures, such as those with the private equity industry and corporate holding structures fall foul of the PFIC rules subjecting the assets to adverse taxation.

Key Filing Requirements:

• If you are a US person who holds shares in a PFIC, you are required to file Form 8621 to report income and distributions from the PFIC. This can include indirect holdings.
• This form must be filed for each tax year you hold PFIC stock, and it must be attached to your income tax return.
• There are no direct penalties for failing to file a required Form 8621 however misreporting PFIC interests can regularly result in underpayment or accuracy related penalties and the statute of limitations for the tax return remains open. The filing is often also reported on the Form 8938 which can lead to penalties for failed disclosure.

Summary

The reporting sphere for US taxpayers living in the UK, or overseas, is extensive and complicated. It is always recommended that taxpayers have adequate support from their accountants to navigate these requirements to avoid creating exposure for themselves.

Non-compliance can lead to significant penalties and legal ramifications. It is advisable to consult with a tax professional who specializes in expatriate taxation to ensure adherence to all regulations and to navigate the complexities of international tax compliance effectively. Staying informed and proactive can help US citizens living abroad fulfil their tax obligations smoothly.