The soaring cost of obeying US tax codes for US citizens living abroad has prompted one of the world’s largest custody firms to pull out of providing this service to UK-based clients, this publication has learned.

Pershing, part of BNY Mellon, will cease to provide financial custody services for US persons where Pershing Nominees is the registered custodian, the firm has told WealthBriefing. The change in the existing arrangement is due to be completed by January 2011, a spokesperson for Pershing said in an emailed statement.

The change threatens to put expat US citizens in difficulty when it comes to finding an institution willing to manage their money. According to the Office for National Statistics, the UK statistics authority, there are 184,000 US nationals living in the UK, many of them in relatively affluent positions in the London financial markets.

WealthBriefing understands that a number of wealth management and financial advisory businesses operating in the UK are affected. It is also understood that a number of offshore custodians are looking at changing their arrangements. One firm confirmed that it had been affected but declined to be identified since it was in the process of contacting clients.

“This is just the tip of the iceberg,” the firm said.

The move is the latest sign that affluent residents in the UK, some of them from abroad, will be under pressure to return to their country of origin or leave the UK for another country due to rising tax and regulatory costs.

In the case of the US, its tax rules weigh particularly heavily because the US – unlike many countries such as the UK – taxes individuals on a worldwide basis, which means US citizens have to file a long tax return regardless of where they live.

Pershing's action stems from how an IRS tax form, known as an 1099 form, which concerns information returns on income other than wages, salaries and tips, is administered. The level of detail in such reports is increasing and becoming more expensive to collect.

“The decision was taken following careful review of new US tax legislation, which would require Pershing to calculate and report the cost basis associated with all securities transactions - even for those assets that had been transferred to Pershing - a process that would not be resource efficient for the firm or for the few clients who currently utilise this service,” the Pershing spokesperson said.

The rising cost of compliance may get even higher if a US piece of legislation, called the Foreign Account Tax Compliance Act of 2009, becomes law, according to international law firm Withers in a recent briefing note.

If enacted in its current form, the Bill would introduce new provisions significantly changing US withholding tax and information reporting regimes, affecting US persons, non-US banks and other financial intermediaries and their affiliates, non-US hedge and private equity funds, and certain other non-US investment structures, Withers said. It will also affect US persons using property held in non-US trusts, it said.