Introduction Most London hedge fund principals who are US persons have, at some point, wondered whether their tax affairs are genuinely under control. The honest answer, in a significant number of cases, is that they are not. The combination of a New York CPA who has never seen the UK fund documents, a UK accountant […]
Most London hedge fund principals who are US persons have, at some point, wondered whether their tax affairs are genuinely under control. The honest answer, in a significant number of cases, is that they are not. The combination of a New York CPA who has never seen the UK fund documents, a UK accountant who does not know what Form 8621 is, and a compliance calendar that nobody coordinates is one of the most common — and most costly — arrangements in the London financial industry. Finding the right accountants for US and UK obligations is not simply about filing the returns that are already on the radar. It is about having a specialist team that discovers what has been missed, corrects the historical position, and then builds a compliance and planning framework that actually works for the specific circumstances of a hedge fund principal. This guide explains what that service looks like from the inside — what happens at onboarding, what a full discovery audit reveals, and what year-round advisory support should deliver. For specialist guidance, contact Jungle Tax at Https://www.jungletax.co.uk/services/us-Uk-Tax.
Accountants for the US and UK are dual-specialist tax practitioners who hold concurrent expertise in both US federal tax law — including the Internal Revenue Code, FBAR regulations, and FATCA reporting requirements — and UK tax law, including income tax, capital gains tax, the remittance basis, and National Insurance. This dual knowledge is essential for a US citizen or permanent resident serving as a hedge fund principal in London. It is the minimum requirement for an adviser who is genuinely capable of managing the full filing and planning picture. The IRS maintains detailed guidance on international tax compliance requirements for US persons abroad at:
https://www.irs.gov/individuals/international-taxpayers/international-taxpayer-services
Most US hedge fund principals in London have a similar setup, with a UK accountant handling self-assessment and a US CPA handling the federal return. In theory, this covers the bases. In practice,e it rarely does. The US CPA rarely has visibility of the UK fund documents, the carried interest vehicle, or the co-investment structures — and therefore cannot correctly assess PFIC exposure, partnership reporting obligations, or the foreign tax credit position. The UK accountant does not prepare the US return and may not even be aware that certain UK income or account positions create US reporting obligations. Neither adviser is looking at the full picture. Specialist accountants for US and UK obligations fill this gap by managing both sides simultaneously as a single integrated engagement.
The adviser managing the US portion of the engagement should be either an IRS Enrolled Agent (EA), the highest accreditation granted to tax professionals by the IRS, or a The adviser handling the US side of the engagement should hold IRS Enrolled Agent (EA) status — the highest credential the IRS confers on tax practitioners — or be a licensed CPA with demonstrable international tax experience. EA status authorizes the holder to represent clients before the IRS in all matters, including examinations, collections, and appeals. On the UK side, the adviser should have relevant professional qualifications from ICAEW, ACCA, or CIOT, along with specific experience of the remittance basis, the UK Statutory Residence Test, and the tax treatment of fund management income. A firm that holds both sets of credentials — or employs practitioners with both — is the standard that an HNW hedge fund principal should insist upon. The ICAEW guidance on cross-border tax practice standards is available at:
https://www.icaew.com/technical/tax/tax-faculty/international-tax
From April 2025, carried interest in the United Kingdom will be taxed as employment income rather than as a capital gain for most fund managers. This change — which aligns the UK treatment more closely with the US approach under IRC Section 1061 — has significant implications for the foreign tax credit analysis. Under the previous regime, UK capital gains tax on carried interest could be credited against the US long-term capital gains charge on the same amount. Under the new income regime, UK income tax at up to 45 percent applies to the same carried interest that the US taxes at capital gains rates. The interaction between these two distinct tax characters in the foreign tax credit baskets requires specialized analysis that only experienced accountants in the US and the UK can provide accurately.
The IRS has significantly increased its focus on FBAR and FATCA compliance in recent years, driven by the flow of financial account data under the OECD Common Reporting Standard and the US-UK Intergovernmental Agreement under FATCA. UK banks, brokers, and fund administrators now routinely report account information for US persons to HMRC, which passes it to the IRS. A US hedge fund principal with unreported carried interest accounts, co-investment vehicles, or personal investment portfolios is therefore increasingly visible to the IRS in a way that was not the case five years ago. Our related guidance on https://www.jungletax.co.uk/jungle-tax-news-updates/streamlined-foreign-filing-offshore-procedures explains what to do if historical filings have been missed.
The Tax Cuts and Jobs Act of 2017 introduced several provisions that are due to expire after 2025, including the enhanced federal estate tax exemption of approximately $13.61 million per individual. If Congress does not act, this exemption reverts to approximately $7 million after inflation adjustment — bringing many HNW hedge fund principals inside the taxable estate threshold for the first time. A US person living in London with a carried interest vehicle, co-investment positions, a UK property, and a US investment portfolio may have a combined estate that significantly exceeds the post-sunset exemption. Planning for this requires specialist accountants in the US and the UK who understand both US estate tax rules and UK inheritance tax rules.
The first and most important element of a discovery audit for a hedge fund principal is identifying every offshore fund vehicle in which the client holds a direct or indirect interest and determining whether each meets the PFIC definition — a non-US corporation in which either 75 percent or more of gross income is passive, or 50 percent or more of assets are held for the production of passive income. Cayman Islands feeder funds, offshore master funds, and certain co-investment vehicles routinely meet this definition from a US perspective. The consequences of holding an unreported PFIC interest are severe: the default excess distribution regime applies interest charges on deferred gains going back to the year of acquisition, and the statute of limitations on the entire tax return remains open until Form 8621 is filed. In every discovery audit Jungle Tax has conducted for a new hedge fund principal client, at least one unreported PFIC position has been identified.
The second element of the discovery audit is a complete inventory of every foreign financial account held by the client — including personal bank accounts, brokerage accounts, carried interest accounts, co-investment vehicles, and any accounts held through intermediary entities. Each account is assessed against the FBAR threshold of an aggregate balance of $10,000 at any point during the calendar year, and against the Form 8938 thresholds under FATCA. In most cases, the audit reveals accounts that have not been included in prior FBAR filings — most commonly the carried interest account and accounts held through the fund’s management company structure. The IRS FBAR compliance guidance is published at:
The third element is a reconstruction of the foreign tax credit position for every year covered by the audit. In the majority of cases reviewed by Jungle Tax, prior year returns prepared by non-specialist advisers have either omitted the foreign tax credit entirely or calculated it incorrectly — most commonly by failing to separate the credit into the correct income baskets (general category income, passive category income, and capital gains) as required by IRC Section 904. An incorrect foreign tax credit calculation results in an overpayment of US tax where credits are understated, or a potential IRS examination risk where credits are overstated. Correcting this position through amended returns can produce a meaningful refund in many cases.
When a hedge fund principal first engages specialist dual-jurisdiction advisers, the onboarding process follows a structured sequence designed to establish the full compliance picture before any new returns are prepared.
Step one — Initial consultation and scope assessment.
The client’s nationality, residency history, domicile position, fund interests, account structure, and previous filing history in both countries are all covered during the adviser’s thorough initial consultation. This conversation establishes the scope of the engagement and identifies the most urgent issues.
Step two — Document collection.
The client provides prior year US and UK returns, fund documents, carried interest agreements, co-investment contracts, account statements for all relevant periods, and K-1s or equivalent fund income allocations. The adviser reviews these documents to identify gaps, errors, and unreported positions.
Step three — Discovery audit.
The adviser conducts the full discovery audit described above: PFIC identification, FBAR and FATCA gap analysis, and foreign tax credit reconstruction. A written audit report is prepared that sets out every identified issue, the applicable rules, and the recommended course of action for each.
Step four — Remediation planning.
Where historical issues are identified, the adviser prepares a remediation plan. This may include amended US returns, FBAR amendments, Form 8621 filings for prior years, or — where the non-compliance was non-wilful — a submission under the Streamlined Foreign Offshore Procedures. The remediation plan is presented to the client with a clear explanation of the options, the costs, and the risks.
Step five — Current year compliance setup.
Once the historical position is resolved, the adviser establishes the ongoing annual compliance framework: a coordinated filing calendar covering UK self-assessment, US federal return, FBAR, Form 8938, Form 8621 for any PFIC holdings, and any other applicable information returns. The HMRC self-assessment guidance is available at:
https://www.gov.uk/self-assessment-tax-returns
Step six — Year-round advisory support.
The adviser provides ongoing support for planning decisions throughout the year — including carried interest realizations, co-investment exits, fund restructurings, and any personal transactions with US or UK tax consequences. This is not a once-a-year filing service. It is a continuous advisory relationship.
Step seven — Annual review and planning.
At the end of each tax year, the adviser conducts a planning review, modeling the impact of any anticipated changes — including legislative changes in both jurisdictions — on the client’s position for the following year.
Marcus is a US citizen who has been based in London for eleven years, working as a senior portfolio manager at a mid-sized credit fund. He had always filed US returns through a New York CPA his previous employer had recommended. He had a UK accountant handling his self-assessment. They had never exchanged words.
When Marcus moved to a new fund and the new employer’s HR team asked whether he was current with his US filings, he assumed the answer was yes. He approached Jungle Tax for a second opinion before completing a new compliance questionnaire.
The discovery audit identified the following: two Cayman Islands feeder funds in which Marcus held co-investment positions had never been assessed for PFIC status — both met the income test. Neither Form 8621 had ever been submitted. His carried interest account at the fund administrator had never been included in his FBAR filings. His foreign tax credit for three of the prior five years had been calculated using a single basket rather than the correct, separate-basket approach, resulting in an understatement of available credits. And his UK self-assessment returns had not correctly reflected the remittance basis election he was entitled to claim in the years before he became a long-term UK resident.
Jungle Tax prepared amended US returns for three years, filed Form 8621 for both PFIC positions using the mark-to-market election to eliminate the excess distribution exposure going forward, amended the FBAR filings to include the carried interest account, and corrected the foreign tax credit calculations. The net result across the three amended years was a US federal tax refund of approximately $14,200. An additional £8,600 in UK tax savings was achieved by amending the UK returns to reflect the correct remittance basis. Marcus now has a coordinated annual engagement with Jungle Tax covering both jurisdictions. Contact our accountants for the US and the UK at hello@jungletax.co.uk or 0333-8807974 if your situation is similar.
The single most damaging structural error is allowing the US CPA and the UK accountant to operate without any coordination. The foreign tax credit analysis, the PFIC assessment, the FBAR coverage, and the remittance basis election all require both sides of the filing to be prepared with full knowledge of the other. When neither adviser sees the complete picture, errors and omissions in one jurisdiction flow directly into errors in the other — and these compound over time into a correction exercise that is significantly more expensive than a properly coordinated service would have been.
Many principals assume that because a professional adviser prepared their returns, they must be correct. In the context of a London hedge fund principal’s US return, this assumption is frequently wrong. The specific issues that arise in this client profile — PFIC reporting, fund partnership returns, foreign tax credit basket separation, FBAR coverage of fund-related accounts — are specialisms within specialisms. A generalist CPA or accountant can prepare a technically adequate return that is nonetheless materially incorrect on these specific points.
When a PFIC position is identified in a discovery audit, it is not enough simply to begin filing Form 8621 going forward. Prior years of unreported PFIC ownership must be addressed, and the choice of election — excess distribution, mark-to-market, or qualified electing fund — has significant retroactive consequences. Filing Form 8621 late without taking advice on the correct election can result in a larger tax liability than necessary. The IRS Form 8621 instructions set out the election options and their consequences at:
https://www.irs.gov/instructions/i8621
The FBAR filing deadline is 15 April, with an automatic extension to 15 October. Many UK-based principals are unaware that the extension is automatic — no form needs to be filed to obtain it. However, the extension is only to 15 October. Missing this extended deadline, even by a day, constitutes a late filing and may incur penalties. Where a principal has multiple accounts and the FBAR is complex, starting the preparation process in August rather than October is always the safer approach.
The availability and cost of the remittance basis changes as a principal’s UK residence history lengthens. The charge for claiming the remittance basis increases at the seven- and twelve-year marks. Under the new rules, the remittance basis will no longer be available after four years of UK residence. A principal who was correctly claiming the remittance basis in earlier years may now be on the arising basis without realizing it, which changes both the UK tax position and the foreign tax credit available on the US return.
Jungle Tax is a specialist US-UK cross-border tax advisory firm. Our team includes IRS Enrolled Agents and UK-qualified tax practitioners with specific experience in the London hedge fund industry — including the PFIC rules, carried interest planning, partnership reporting obligations, and the interaction between the UK remittance basis and the US worldwide income obligation. We are not a generalist practice. Every client we take on has simultaneous US and UK tax obligations, and managing that dual exposure is all we do.
Our onboarding process for a new hedge fund principal engagement always begins with the full discovery audit described in this guide. We do not simply pick up where the previous adviser left off. We review prior years, identify all gaps and errors, and present a clear remediation plan before any new returns are prepared. This approach has consistently identified material issues — PFIC positions, FBAR gaps, incorrect foreign tax credits — that prior advisers had missed, and has produced refunds and tax savings that more than offset the cost of the specialist service. You can find further information on our US expat tax advisory service page, or read our guide to accountants for US and UK obligations for additional context on the dual-jurisdiction advisory model.
If you are a US person working in the London hedge fund industry and have never had a full discovery audit of your US-UK filing position, contact our US and UK accountants at hello@jungletax.co.uk or call 0333-8807974.
For US hedge fund principals in London, the difference between adequate tax compliance and genuinely optimized compliance is almost always a specialist discovery audit and a properly coordinated advisory arrangement. The three most important points from this guide are these: PFIC positions in offshore fund vehicles are the most commonly missed and most consequential filing failure for this client profile; the foreign tax credit analysis must be prepared as an integrated exercise covering both jurisdictions simultaneously to be correct; and the value of specialist accountants for US and UK is not just in preparing the returns — it is in discovering what has been missed and correcting it before the IRS does. A properly conducted discovery audit pays for itself through refunds, penalty avoidance, and the confidence that the position is genuinely under control.
Speak to a Jungle Tax adviser today — contact us at hello@jungletax.co.uk or visit our https://www.jungletax.co.uk/services/us-uk-tax to learn more.
A discovery audit is a structured review of a client’s complete US and UK tax filing history, conducted before any new returns are prepared. It covers the prior year returns in both jurisdictions, every foreign financial account, every offshore fund interest for PFIC assessment, the foreign tax credit calculations, and any information returns that should have been filed. The discovery audit for hedge fund principals nearly invariably finds problems that previous advisers overlooked, most frequently improper foreign tax credit basket separation, PFIC positions, and FBAR gaps. Starting with the discovery audit ensures that the remediation exercise is complete before the ongoing compliance framework is established.
The mark-to-market election allows a US person who holds a PFIC interest to include in ordinary income any increase in the fair market value of the PFIC shares during the tax year, and to deduct any decrease. The election eliminates the punitive excess distribution regime — which applies interest charges to deferred gains dating back to the year of acquisition — and replaces it with current-year income inclusion at ordinary-income rates. The election is generally the preferred approach for liquid fund interests where the value can be determined annually. For illiquid co-investment vehicles where a fair market value is not readily determinable, the qualified electing fund election or the default excess distribution regime may be more appropriate. The choice requires specialist analysis.
Yes, provided the non-compliance was non-wilful — that is, it arose from negligence, inadvertence, or a good-faith misunderstanding of the law rather than a deliberate decision to conceal accounts. For a principal whose FBAR omissions resulted from a genuine lack of awareness that carried interest accounts or co-investment vehicles were reportable, the non-wilfulness argument is generally strong. A submission under the Streamlined Foreign Offshore Procedures covers three years of amended returns and six years of FBAR filings. It carries no miscellaneous offshore penalty for those meeting the foreign residency requirement. Our full guide to the Streamlined procedures is available at the Jungle Tax blog.
From April 2025, carried interest will be taxed as income in the UK at rates up to 45 percent. In the United States, carried interest subject to the three-year holding period rule under IRC Section 1061 is taxed at the long-term capital gains rate of 20 percent for high earners. The UK income tax on the carried interest falls in the general income basket for foreign tax credit purposes, while the US tax on the same amount may be characterized as a capital gain. This mismatch between the UK and US tax characters means the foreign tax credit may not fully offset the US liability, and the surplus UK tax may not be creditable in the same year. Modeling this position requires specialist dual-jurisdiction analysis.
Beyond the federal income tax return, a US hedge fund principal in London typically needs to file FinCEN Form 114 (FBAR) for all foreign financial accounts exceeding the aggregate threshold, Form 8938 (Statement of Specified Foreign Financial Assets) under FATCA, Form 8621 for each PFIC interest, Schedule K-1 equivalents or Form 8865 for any foreign partnership interests, and potentially Form 5471 if the principal has a controlling interest in a foreign corporation. Where carried interest is received through a partnership, a K-1 from the partnership should be included in the return. The specific combination of forms required depends on the fund structure and the principal’s interests within it.
The complexity of the fund structure, the number of prior years to be reviewed or amended, the number of PFIC roles, and other factors all affect the cost of a specialized dual-jurisdiction engagement. and the scope of the ongoing annual service. A straightforward annual compliance engagement for a principal with a clean history might cost between £3,000 and £6,000 per year. Where a discovery audit reveals historical issues requiring remediation, the initial engagement is typically higher but frequently produces refunds and tax savings that more than offset the additional cost. Jungle Tax provides a clear fee estimate at the outset of every engagement, following the initial consultation and document review.
