From the December 2007 issue of Wealth Manager Web • Subscribe!

The Expat Client

Senior U.S. executives and professionals are emigrating in waves. Foreign assignments are now regarded as plum positions, often critical to career advancement, and London has become a preeminent business and financial nexus. As a financial advisor, then, you may encounter clients who are being assigned to the United Kingdom or are at least contemplating such a move for their careers. And while London is a particularly good example of the opportunities and challenges in an overseas move, basic relocation issues are similar everywhere: No matter where your clients find themselves, they will face a host of financial and lifestyle issues that you can help them manage.

The first message to convey, says Parvin Manuchehri, is that life in London is quite different from that in the United States. Manuchehri, who is vice president of Wealth Management Services at YCMNET Advisors, in Walnut Creek, Calif., suggests those thinking about a move begin their research by reading widely, surfing the Internet and talking to any colleagues currently living there. "If possible, take a scouting trip a few months before the move," she adds.

Too many Americans underestimate the adjustments of relocating. Expense and lack of customer service head the litany of complaints. In London, some stores are open only from noon to 5 p.m. on Sundays. Restaurants stop serving by 10--and very few deliver. It may take weeks to get satellite or cable television installed. Even quality hotels often lack showers. But "Eventually, most expats become resigned to the inconveniences," says Debora Harrington, manager of the London-based American Women's Club (AWC).

And then there's the work culture which, in the United Kingdom, is still not driven by a U.S.-style profit motive. With a long history of class and social distinctions and aspirations, the British are less focused on simply making a buck--or a pound. Sam Adams, a vice president at the London office of multi-national Dimensional Fund Advisors, points out that where personal service and care is a more important element than profit alone-- as in education or nursing--the British system may actually work better.

Another problem--especially for spouses of expatriate workers--is the loneliness and isolation they may confront. Many need to create the support network among friends and family they left behind. It takes time to build relationships, which--in London and other cities abroad--are based on different formalities. Harrington reports that many of the women discover the AWC as a "lifeline," and can become quite emotional when they make the initial contact. "People won't talk to you here if you are alone," she warns. For example, in London strangers usually shudder to address each other in a line ("queue") or on the bus.

The new kids on the block must learn to fit in, too. Children of expats find themselves in new schools, among fellow students who speak with different accents and usually wear uniforms. "U.S. nationals tend to try to keep their kids in U.S.-style institutions, like the American School," says Siobhan Cummins, managing director, Europe of ORC, a global compensation and HR management consultant. Although that choice allows them to follow an American program, "it means they may not assimilate and integrate as well as they might at a local school," she cautions. Another advantage of attending a British school is that it provides opportunities for the parents to socialize with local families.

Jack Klinck, who was chairman of Mellon Europe until 2005, deliberately chose to send his children to private English schools--the equivalent of American public schools--to benefit from the diverse and international student body. Klinck, who is now with State Street in Boston, adds, "We also liked the emphasis on the fundamentals--reading, writing, math--that the UK curriculum establishes from the early years."

The two countries remain separated by a common language, as Oscar Wilde quipped over a hundred years ago. Charles Gundy, managing director and head of European structured finance at CIFG, a financial guarantor group, emphasizes that "Brits are more understated about wealth and possessions. At a New York cocktail party, guests are not embarrassed to discuss the prices of their real estate!" Delivery counts too. Americans tend to speak more loudly in public than their whispering British counterparts, "as if they believe that what they have to say is worth overhearing," Gundy notes wryly. "Bubbly Americans get their feelings hurt by bewildered reactions," he adds.

Compounding social stresses, expats struggle with long hours as they familiarize themselves with new systems, procedures and processes. Realizing that they represent an expensive commodity to their firms, they feel compelled to work even harder to justify their roles. Late-night conference calls to faraway time zones and frequent business travel further complicate the schedule, and add to the pressures on their families.

Finally, unless you're used to the climate in Seattle, you had better be prepared to face stretches of dreary British weather. Sam Adams, an expat who hails from California, admits that he misses the bright skies and sunshine. "People forget how far north London is!" he says.

The Price of Eggs

But it's the cost of living in London that hits hardest. No expatriate package ever fully prepares the transplant for the sticker shock of--almost everything. According to a June 2007 Mercer Human Resource survey, London ranks as the world's second most expensive city, behind Moscow. Some companies, at least, will make adjustments for foreign exchange shifts. Chris West, who worked in London in 2000 for Sanford Bernstein, recalls that his firm would reset the exchange multiplier every quarter.

Accommodation is the steepest expense. Besides base pay and bonuses, employers typically provide allowances for housing, children's education, medical insurance, relocation expenses, and a couple of personal trips for home leave. Company policy dictates the frequency and class of travel.

Many corporations offer destination services support for rookie expats, including relocation agents who coordinate a host of real estate agents, ferry the prospective tenants around and sort out the lease. "You need someone to do the legwork, to help you understand the neighborhoods and price ranges," says Dan Draper, head of ETFs UK for Lyxor. "It's a brutal property market, and you will need to see a lot of spaces before you choose." He himself looked at about 25 apartments over the course of six weeks before he decided on one.

Although small terraced houses in London are often worth several million dollars, they are miniscule compared to a ranch house in Houston or San Diego. New Yorkers, who are used to cramped spaces, are less daunted than other Americans by the size of London accommodations. However, in terms of square feet, quality of carpeting and fitting, they pay many times over New York rates for "rabbit hutches," according to Gundy. West, for example, went from paying $2,900 a month in Manhattan to $6,000 in London. And don't expect walk-in closets or multiple garages.

Most other items--from restaurants to transportation--also are much pricier than Americans expect. Zagat reports the average cost of a meal in a London restaurant as $79, versus $39 for New York. Large shopping malls are nonexistent, and there is no opportunity to buy in bulk. The American schools, which charge even more than their UK private counterparts, can "hold expats to ransom," as Cummins puts it, knowing that employers often pay the bill. As for hotels, they may need somewhere to lodge visitors from home that they can't accommodate in the "rabbit hutch." Draper suggests B&B's as an economical alternative; and Londoners will often rent out apartments for a more reasonable weekly rate.

Companies struggle too, with the issue of "localizing" employees away from expatriate status. Once an assignment has continued for a number of years, it is likely an employee may stay indefinitely. Some firms state a policy that will localize everyone after a number of years, whether or not they follow it for business-critical executives. Others, like Mellon, review their status after five years, according to Klinck. "At the higher levels, it is all negotiable," Draper points out.

"People get a rundown of allowances, or a lump sum as a sweetener to buy them out," Cummins explains. The most common reduction pattern is to go from 75 percent after year one, to 50 percent the following year, and then 25 percent. Sometimes, even after localization, employees receive a lump sum based on several years' allowances as a buyout.

Trans-Atlantic Taxation

Most employers also try to ease the burdens of expatriate tax liability with tax equalization. The general principle is to neutralize an assignment from a tax standpoint, by holding someone to the same tax as they would have occurred in the United States, and paying the U.K. excess amount on behalf of the employee. "It's fair and equitable, and takes away any incentive for being dodgy," says Kevin Johnson, a partner at New York-based Mahoney Cohen & Company.

While Americans are taxable on worldwide income wherever they are or go, tax residence in the Untied Kingdom raises the concern of double taxation. Among higher earners, the differences become critical, as U.K. rates are generally higher. Relief is available from the Foreign Earned Income Exclusion, which, for 2007, exempts from the U.S. tax return the first $85,700 in 2007 earned overseas. A foreign housing exclusion can further reduce U.S. taxes on foreign source income. While expats can claim a Foreign Tax Credit to offset their U.K. taxes, they cannot claim for income or housing that has already been carved out through the Foreign Earned Income Exclusion.

Even with the exclusions and tax credits, Americans may be subject to higher effective tax rates. American earners pay 35 percent after reaching approximately $350,000 of taxable income, while a UK rate of 40 percent kicks in at ?34,600 (a little over $2 a pound at press time). "So you get there faster, and the rate is higher," Johnson explains.

Most U.S. companies use an accounting firm to help with the thorny issues of equalization. Employers generally limit the amount of personal income (such as interest and capital gains) that they will tax equalize. Adams advises prospective expats to meet with a professional before relocating. There are ways to keep assets offshore, but if you make a mistake you become taxable in both locations. "Don't think you can do it alone. There are large sums of money at stake," he warns.

You can cut down on your tax bill by traveling abroad: If your assignment is for less than three years, and is properly structured, you can obtain relief for workdays spent outside the UK. But watch out! If you buy a home in the U.K., you are likely to become a U.K. tax resident and lose the non-workday relief.

The United States allows excess foreign tax credits to be carried forward for 10 years, but you need foreign-source income, earned overseas, to absorb them. "Some people who come back with credits will continue to travel overseas, and they can allocate some of that compensation as a foreign source," Johnson suggests. "They might also consider exercising stock options over an extended vesting period, to generate additional foreign-sourced income."

Happy Campers

Many expats thoroughly enjoy their foreign assignments and extol the benefits of living abroad. Yet ironically, often cited as number-one among the pleasures of London life is the joy of leaving London--of jetting off to other European countries on weekends and short breaks. The proximity to the rest of the continent makes it easy to travel. But there are other conveniences inside the United Kingdom that they do appreciate.

During their U.K. assignments, most Americans rely on private insurance for complex medical treatments, while the National Health Service provides an adjunct for day-to-day needs. "The facilities are not always shiny, but they are free," Gundy points out. "And it's nice not to have to supply your credit card when you arrive at a hospital." Every patient must register, however with a local National Health General Practitioner, and it is not always easy to be accepted on every list. "We decided to use a National Health hospital," explains Draper, whose daughter was born last year at the Chelsea Westminster. "Prenatal is one of the strongest areas, although we would have switched to private [coverage] had we encountered any complications." Expats may need to keep up their medical insurance coverage in the U.S. if they are away for a few years. If they return, after a gap in coverage, they may not be covered for pre-existing conditions.

Americans will be pleased to discover that consumer banking is one area that is "light years ahead in the UK," according to Adams. Direct debit systems are much more widely used to pay all regular bills and make transfers. In addition, retail banking networks allow a host of services, including point-of-sale transactions made by telephone from non-bank locations--including homes. By supplying an account number and sort code instructions, a checking account holder can direct a payment to anyone at any time. Adams points out that he has hardly written a check in over two years.

Of course, London offers the full panoply of cultural attractions, from performing arts to world-class museums--most of them free. "I particularly appreciated living in a city with so much commercial history and deep-rooted traditions," says Klinck. History buffs can join in guided walks based on themes like Dickens' London, Jack the Ripper, ghost and murder walks--and more recently--the Da Vinci Code. Draper likes poking around in sites such as the Bank of England museum, the Royal Exchange, Leadenhall and Spitalfields markets. "London has done a good job of balancing modernization with the old architecture," he says. He also enjoys a drink at the George & Vulture, a tavern founded in 1660, where Dickens wrote The Pickwick Papers.

Then and now, London remains a cosmopolitan center that attracts professionals of all nationalities. Except for New York, no U.S. city can provide the same degree of international flavor. "Americans are often parochial, and moving overseas can be a scary proposition," Adams notes. "A move to London is like a move to the moon." But for those who relish the adventure, a U.K. assignment can be a rewarding experience.


U.S. expats congregate at a variety of clubs and associations in London, ranging from Republicans and Democrats Abroad, to U.S. softball leagues that play on the lawns of Hyde Park. Many major American universities maintain club facilities and affiliations in the city, including Princeton, Harvard, Yale, Duke, Stanford and Dartmouth.

The American Women's Club has been bringing wives and professional women together since 1888, when the 25 founding members met at one another's homes. These days, activities include antiques, bridge, mahjong, a running club, book club, private museum and art gallery tours and children's play groups. At the end of September, members enjoyed an excursion to Crown Jeweler Garrard for high tea and the opportunity to try on tiaras and other pricey baubles.

Rover Overseas

The good news for expatriate pet owners is that their pooches need no longer undergo a six-month -quarantine when they arrive from the United States. Under the Pet Travel Scheme inaugurated in July 2004, the animals can now be fitted with a microchip carrying a unique identification number. A vet's certificate and a blood test confirm that the pet has been vaccinated against rabies and is protected from ticks. "In the past, the decision to relocate often involved the quarantine requirement for pets," says Tammie King, veterinary nurse and zoologist at the Brompton Veterinary Clinic, which serves many Americans in the neighborhood. Harrods even sells pet passport holders now, designed with a slot for photos. The photos are optional.

Vanessa Drucker, who used to practice law on Wall Street, divides her time between New York and London.

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