If you took professional advice before moving from the UK to California, for example, your advisor would have pointed out an almost universal rule: arrangements which made total sense in a UK domestic context do not have the same favourable outcomes when brought within the scope of Federal and California income taxes.
If you arrived in California without that advice, at tax return time you will have discovered the hard way that UK stalwarts – such as investments in ISAs and unit trusts – can vary from a bad to a disastrous US tax outcome.
A similar degree of wariness is required prior to departing California for permanent relocation in the UK. If some standard US planning and structuring is still in place when you resume residence in the UK, you will have a happy outcome.
While living in the USA, you may well have taken advice and structured your affairs in a way that was advantageous from a US perspective. This need not have involved tax planning advice. It could have been doing things for non-tax reasons, but in the knowledge that there was no Federal or California tax implications.
- Purchasing a home and holding title to the property via a Limited Liability Company that is 100% owned by you.
- Holding other investments through that Limited Liability Company.
- Having a California lawyer draft your will.
- Establishing a ‘living trust’ to hold investments and other property.
Examples of what can happen if you fail to act in time.
1. For both Federal and California tax purposes, there is no difference in holding title to an asset in your own name and holding it via a 100% owned Limited Liability Company. The Limited Liability Company is disregarded for tax purposes. However:
- There is no such disregarding for UK tax purposes.
- Before you return permanently to the UK, it may be necessary to wind-up the Limited Liability Company and distribute all its assets.
- The Limited Liability Company is treated by the UK as a corporation and it will have to file UK corporate tax returns.
- Extraction of cash from the Limited Liability Company will cause a UK taxable event which has no US counterpart.
2. Any will that you have executed while in the US will almost certainly be designed to optimise the position under Federal and California death taxes. Such a structure will not be a good fit with the UK Inheritance Tax regime.
3. A standard US estate planning technique is to hold assets through a ‘living trust’. This is done to avoid delays in getting probate. In the US, a ‘living trust’ is disregarded for tax purposes, in much the same way as a Limited Liability Company.
- For UK purposes, depending on the controlling documentation, there may be either a disregarded or ‘bare trust or a separate taxable entity.
- Consequently, the governing documentation of a ‘living trust’ must be reviewed well before the planned date for returning to the UK.
- It may be necessary to collapse the ‘living trust’ prior to resuming UK residence.
Making the most of your free consultation with Blick Rothenberg
Your free consultation with Blick Rothenberg can be used to start identifying things that need to be un-wound or restructured before you become a tax resident of the UK.