With just under a month to go to the US elections, there may be nerves on both sides of the pond as to the result and wider implications. The New York Times ran an article last month entitled, “These Americans want out”, telling the stories of people who are considering leaving the US should the wrong candidate win. So, what are the tax implications if you move to the UK from the US?
Here is our guide to some of the key issues including steps to take before stepping on that plane across the pond.
A new regime is coming!
All UK residents are subject to tax on their worldwide income and gains; however, some US individuals (and other non-UK domiciliaries) will often rely on the remittance basis of taxation to shelter their non-UK income and gains from UK tax. This generous basis of taxation can be claimed for the first 15 years of UK residence and is free of charge for the first seven (but personal allowances will be forfeited). On this basis, non-UK income and gains are kept out of the UK tax net provided they are not brought here.
From 6 April 2025, the remittance basis is expected to be replaced by the FIG regime which will make exempt all non-UK income and gains for the first four years of UK tax residence. This could simplify the tax position of a US individual coming over to the UK for less than four years. For those intending to stay in the UK longer, essentially, they will enjoy a four-year tax holiday in relation to directly-owned, non-UK assets. Crucially, this does not extend to entities which may be brought into the scope of UK tax should you become UK resident. More on that later…
Timing your arrival early in a tax year could be key to maximising the four-year holiday and don’t forget that our tax year begins on 6 April rather than 1 January. Individuals may need to seek advice as to when their four-year tax holiday begins and ends.
Number 1 rule: Seek UK tax advice before you leave the US.
If you are a Green Card Holder or US citizen, you will remain subject to US tax on your worldwide income and gains whilst living in the UK. There is a double tax treaty which will hopefully eliminate double taxation but there are anomalies which the treaty can’t fix. Finding out whether you are affected by any of these anomalies is key, as is taking action in good time before you arrive.
Pre-arrival checklist
- Introduce your UK adviser to your US adviser. After you have sought UK tax advice, you need to introduce your advisers so that they can begin working together in your best interests to plan your arrival to the UK. Once you are UK resident, you may need to file returns both in the UK and US, so you will need these returns to marry up and not conflict in anyway. HMRC and the IRS will exchange information regarding your affairs, so it is essential your advisers do too!
- Do you have any LLCs or S-Corporations? Certain structures which make perfect sense to use in the US may have adverse tax implications here in the UK. LLCs and S-Corporations are prime examples because the UK and US tax codes do not align in their tax treatment. It may be that prior to your move, you need to alter the operating agreement, switch off distributions, or take a large distribution.
- Review your investment portfolio. Certain US investments receive favourable tax treatment in the US which is not mirrored in the UK and can lead to surprise tax bills. A few examples are:
a. Mutual funds will be subject to income tax on sale unless they are ‘reporting funds’.
b. Qualifying dividends in the US are taxed at 15% (plus 3.8% net investment income tax which cannot be reduced with a foreign tax credit), whilst the UK rate may be as high as 39.35%.
c. Whilst this is not a tax code differential, exchange rate differences can vastly change the UK taxable gain when compared with the US equivalent. In some cases, there may be a loss realised in the US but a chargeable gain in the UK.
If you have an investment manager, you should make them aware of your impending move and consider making changes to the portfolio either before you arrive or whilst you are taxable under the FIG regime.
- Review all trusts on which you are a trustee, settlor or beneficiary. Although trusts exist under both the UK and US tax codes, the tax treatment can be very different and there can be unexpected consequences. Advice should be sought before arriving in the UK and you should also let the trustees know of your impending move.
A prime example of there being unexpected consequences for a trust when an individual moves to the UK is where that individual is acting as sole trustee. In this scenario, the trust will become UK resident and be brought within the scope of UK tax in addition to US tax. In theory the treaty can prevent double taxation but in practice it can be a very long-winded path to take. A better solution would be to add a US resident individual/corporate trustee prior to arrival in the UK, or for the individual to step down as trustee prior to arrival in the UK.
Revocable trusts are also very common within the US and can cause UK tax issues because they will not necessarily attract the same tax treatment in the UK. The UK treatment will depend upon the drafting of the trust deed and the US state under which it is governed. In some cases, the trust will be tax transparent and mirror the US treatment and in other cases the trust will be a taxable entity which will have much more significant UK tax consequences. Therefore, the trust deed should be reviewed by a UK tax adviser who will also consider whether the trustees will have an obligation to register under the UK Trust Registration Service.
- Impact on corporate entities: In certain circumstances, a director, partner or employee moving to the UK could trigger a UK permanent establishment for that entity bringing some of the profits into the scope of UK tax. This risk can be managed but the sooner this is spotted the better and therefore this should be reviewed before the individual moves to the UK.
Summary
Whilst tax isn’t necessarily the foremost thing in people’s minds when making such a life change; neglecting to seek advice in both the US and the UK in good time might result in unforeseen costs. The FIG regime may simplify matters for many in the short term but it also might encourage a ‘laissez-faire’ attitude with individuals not appreciating the wider impact of becoming UK resident. The tax treatment of trusts is particularly complicated when moving from the US to the UK making expert advice crucial before you take the plunge.
At Mercer & Hole, our motto is always that time is the essence when ensuring your finances are in order particularly when you make such a life-changing move. The political arena might be unpredictable and new regimes come and go, but good tax advice will ensure that at least your financial affairs are stable in an ever-changing world.
Contact us
If you are considering moving to the UK from the US and have concerns about the tax treatment of your assets, please don’t hesitate to contact Lynsey Lord or a member of the private client team for professional advice.