When moving to another country, tax and estate planning matters may not be the first things that come to mind. However, if you are intending to move to the UK, you ought to seek advice as to your UK tax obligations and estate planning as soon as you can. Otherwise, you may lose out on tax and estate planning opportunities.
Although this applies to anyone moving to the UK, there are certain points that all US citizens or Green Card holders should consider well in advance of moving to the UK.
Although US citizens remain liable to pay US tax wherever they live in the world, whether you are liable to pay UK income and capital gains tax primarily depends on your UK residency position.
The UK has a statutory test to determine when an individual becomes resident in the UK (known as the Statutory Residency Test or SRT).
The SRT operates by running through a series of tests to determine if you are UK resident in that particular UK tax year (which runs from 6 April to 5 April rather than the calendar year as in the US).
If you are a UK resident under the SRT, your worldwide income and gains are within the scope of UK income and capital gains tax.
If you arrive in the UK part way through a UK tax year, you are usually treated as a UK resident for the whole of that tax year which means that any income and gains arising before you arrive in the UK could be subject to UK tax, unless you are eligible for “split year” tax treatment. If split year treatment applies only income and gains that arise after the date on you arrive will be subject to UK tax.
It is possible to spend a significant amount of time in the UK without an individual becoming a UK resident, which can be particularly useful if you only want to spend limited time here.
You will remain liable to US tax while you are resident in the UK. There is a double tax treaty between the UK and the US which is intended to prevent you paying tax twice. However, navigating the treaty and the tax rules in the UK and the US is complex and so from a practical perspective you should find an accountant who has experience in this area to help prepare your US and UK tax returns once you arrive in the UK.
Your liability to UK inheritance tax depends on your domicile status, but your domicile status can also have an impact on your ability to claim the remittance basis in relation to income tax and capital gains tax, which we discuss below.
In broad terms, you acquire a domicile from your father when you are born, if your parents were married at that time, or from your mother if they were not married. You can change your domicile by being resident in another jurisdiction and having an intention to remain their indefinitely or permanently. The domicile rules are more subjective than the SRT as, in practice, when your domicile is tested, HMRC will look at every aspect of your life to weigh up whether your actions support your intention.
There is also the concept of “deemed” domicile which applies in relation to tax only. You become deemed domiciled in the UK if you are UK tax resident for at least 15 out of the previous 20 tax years before the relevant year.
If you are domiciled or deemed domiciled in the UK at the time of your death, your worldwide estate is within the scope of UK inheritance tax, but if you are not, only UK situated assets are within the scope of UK inheritance tax.
If you transfer assets into a trust or to a company when you are UK domiciled or deemed domiciled there could be liable to an immediate inheritance tax charge.
In the US the estate and gift tax exemption is at an all-time high of $12,920,000. In the UK, the equivalent inheritance tax allowance (known as the “nil rate band”) has been frozen at £325,000 for many years. Inheritance tax is charged at 40% on the value of your estate which is not otherwise relievable on your death. Equally, if you do transfer assets into a trust or to a company, there can be immediate inheritance tax consequences.
It is important to review your domicile position and to understand the rules, as there are some immediate and longer term planning options open to you.
If you are UK resident but non-UK domiciled, you can elect to be taxed in the UK on the remittance basis of taxation. This means that you will pay UK income tax and capital gains tax on your UK source income and gains and any foreign income or gains you “remit” to the UK. Any foreign income and gains which you do not remit will not be subject to UK tax.
The definition of what constitutes a remittance is very broad but in its simplest form is when money derived from foreign income or gains is brought into or used in the UK.
The remittance basis can be claimed at no charge in the first seven years you are a UK resident. There is then a £30,000 charge from your seventh year of residency. This increases to £60,000 from your twelfth year of residence. Once you become deemed domiciled you can no longer claim the remittance basis.
As US citizens and green card holders are taxed in the US no matter where they are living matters are more complicated than for other foreign nationals. While the UK/US double tax treaty will give credit for tax paid in one country against tax owing in the other, the rates at which tax is charged in each country could mean that claiming the remittance basis is not the best option, but this will very much depend on your individual circumstances.
It is possible to take steps before you become a UK resident to keep taxable remittances to a minimum and what planning is best will depend on multiple factors such as the amount of time you intend to remain in the UK and the level of flexibility you require. However, remittance basis planning must be undertaken before you become UK resident and you should ideally seek such advice in the tax year before you intend to move to the UK as otherwise some of these steps will not be available.
If you are the trustee or a beneficiary of a trust you should have the trust reviewed from a UK perspective well in advance of arriving in the UK. The UK rules around non-UK trusts are different to those in the US and have a number of complexities for the unwary.
For example, the residence status of a trust for UK purposes depends on the residence status of the trustees. We often see clients fall into the position where they are a trustee of a trust and by moving to the UK accidentally make the trust taxable in the UK?
There are also complex rules that determine how a UK resident beneficiary is taxed upon receiving a distribution from an offshore (i.e., US) trust. Depending on the type of trust, the UK tax position can be beneficial but it is important to seek advice.
It is very common for US citizens and Green Card holders to have a revocable grantor trust (also sometimes known as a living trust) as part of their US estate plans.
The revocable grantor trust is created during the individual’s lifetime and is intended to avoid probate in the US because all (or most) of the individual’s assets are then transferred into the trust. Typically, the terms of the trust stipulate that the grantor has full access to the assets during their lifetime and then on their death or incapacity, the assets are to be held on new trusts or outright for the benefit of their family.
From a UK tax perspective, trusts of this sort can be problematic if you are a grantor or beneficiary moving to the UK. They can be particularly problematic if you are a British expat returning to the UK or are likely to become domiciled in the UK. We advise that these are looked at carefully before you arrive.
If you are moving to the UK or own assets here, you should look at your estate planning and consider whether you need a UK will.
Many Americans who come to the UK are married to a UK spouse. While gifts on death to a spouse can be completely tax free in both the UK and the US, the conditions for each exemption are different in both the UK and US. This can mean that, without careful planning, a US/UK couple find themselves paying both US and UK tax.
For example, if the US spouse dies first leaving their entire estate to their non-US spouse the US will apply US estate tax. If the US spouse’s estate is more than their US estate tax exemption US estate tax will be due. In the UK the gift would be covered by the spouse exemption and so there would not be any UK inheritance tax.
Instead, UK inheritance tax would arise on the death of the non-US spouse. As the UK tax and the US tax arise at different times the US/UK double tax treaty will not be available to eliminate double taxation.
It is possible to deal with this mismatch by incorporating a specific form of US trust known as a QDOT into the US spouse’s Will. The effect of this is to defer all US death taxes until the death of the surviving non-US spouse. This means that death duties in the US and the UK arise at the same time and so the double tax treaty will assist to secure relief from double taxation.
If you are going to be living in the UK or retain assets in the UK, you should also consider putting in place financial Lasting Powers of Attorney. These allow you to appoint individuals to make decisions around your UK assets should you lose capacity. US clients often have Durable Powers of Attorney in place; while these will remain valid for your US assets, they will not be accepted in the UK.
If you are going to be living in the UK for a protracted period of time, you may also wish to consider putting in place a health and care Lasting Power of Attorney.
Under UK rules a non-UK company is deemed resident in the UK if its central management and control is in the UK. If a company is resident in the UK, it will be liable to UK tax.
If you are a director or have significant influence over how a company is run and are moving to the UK, you should take advice as part of your pre-arrival planning. The rules in this area are broad and whether or not the company will fall foul of them will depend on the circumstances.