What do US individual’s need to consider when moving to the UK?
What do US individual’s need to consider when moving to the UK?
It’s very common for Americans to move to the UK, as many believe it is one of the top destinations in the world to relocate to. However, before moving to the UK, US individuals need to consider current (and future) UK and US tax obligations.
The starting point is to consider your US and UK residency status and the impact it will have on your worldwide taxes. As the UK Tax Year (6 April to 5 April) is different from the US (1 January to 31 December), it is important to discuss moving to the UK ahead of time as there may be some planning opportunities available to ensure your worldwide taxes align.
For more information, please read our previous article on check-the-box elections.
Planning is key
Both the US and UK generally claim you as resident if you spend more than 183 days in their country. However, the UK’s ‘Statutory Residence Test’ also allows for UK residency status to be determined based on ties to the UK and circumstances for coming (e.g., employment start date, availability of home, location of family). The UK’s residency rules and the US-UK Double Tax Agreement can be used to split US and/or UK tax years into a resident and non-resident period.
Once UK residency status has been determined, you may need to file a UK tax return by 31 January following the year of arrival. Those who have a domicile outside the UK will need to consider their type of income and if they can make a claim to exclude their non-UK income and/or gains from UK tax using the ‘remittance basis’.
UK arrivals will need to request a Unique Taxpayer Reference from HM Revenue and Customs (HMRC) in order to make UK tax payments and file tax returns. Should a taxpayer be self-employed, they will also need to notify HMRC of their self-employment status and ensure HMRC are aware of their National Insurance/Social Security status (e.g., self-employed, employed, or exempt if they continue to pay into their home country and qualify for a ‘Certificate of Coverage’). It is important to discuss this with a US/UK tax advisor ahead of time to ensure UK tax payments can be made promptly, and in line with the US tax year if needed.
As US people (US Citizens/Green Card Holders/Residents) are taxed on their worldwide income and/or gains, it is important for Americans living in the UK to be aware of the US-UK Double Tax Agreement. Various steps can be put in place to alleviate the risk of ‘double taxation’, in particular, for UK taxable income and/or gains received in the calendar year that are also taxed in the US. Therefore, it is important for anyone navigating both tax jurisdictions to consider the timing of their UK tax payments and ensure they make any required UK tax payments by 31 December, to ensure they have enough foreign tax credits to offset their US taxes in the same calendar year.
Investments and earnings accounts in the US
While moving to the UK doesn’t necessarily mean US taxpayers will need to dispose of their non-UK assets for tax purposes, it is important to discuss the type of asset, its current valuation and if this is compatible with the UK tax system. For example, US-based investment accounts may contain offshore funds that are not HMRC approved (also known as an HMRC ‘non-reporting’ fund).
UK resident individuals holding non-reporting funds may generate ‘Offshore Income and Gains’ which are taxed at the higher income (not Capital Gains) tax rates upon disposal. Furthermore, losses from Offshore Income and Gains cannot be used to offset other gains. It is therefore important to discuss the tax treatment of these non-reporting funds before arriving to the UK to understand:
- Your worldwide tax exposure upon sale while UK resident
- If you should dispose of these investments before arriving in the UK
- If you should consider the structuring of your ‘non-UK’ bank accounts to exclude foreign income and/or gains from UK tax.
Similarly, while the use of Limited Liability Companies (LLCs) and Living Trusts are popular among Americans, these may not be compatible with the UK tax system due to the mismatch in US/UK tax treatment. For example, if the owner of the US LLC lives in the UK, there may be a risk of ‘double taxation’ once a distribution is received as the UK considers LLCs to be a corporation. This is in contrast to the US, where LLCs are considered ‘pass-through’ entities and individuals are taxed on income/gains as they arise. As such, the timing of distributions/dividends from an LLC should be considered along with various other items such as the LLC operating agreement/activities and location of the LLC.
With regards to Living Trusts, while this is again a common tax planning tool in the US, this may not be suitable for UK tax purposes. Determining if the Living Trust is actually a ‘Bare Trust’ or Settlement for UK tax purposes is therefore important, along with discussion regarding the residency status of the settlor/grantor, trustee(s) and/or beneficiary(s).
Investments in the UK
As a US individual living in the UK, you may have access to various financial instruments that are tax efficient in one jurisdiction, but not the other. For example, while Individual Savings Accounts (ISA), are tax free in the UK, the US will still seek to tax the income and/or gains generated from these accounts. In contrast, US individuals holding tax exempt assets (e.g., Treasury Bills or Municipal Bonds), will often find that the tax savings generated at the Federal/state level are lost once entering the UK tax net.
Additional care should be taken to the holding of foreign assets that the IRS wishes to tax more punitively. For example, if a ‘stocks and shares’ ISA is held, or any other collective investment, (e.g., OEIC’s, offshore bonds, etc), this may be considered a ‘Passive Foreign Investment Company’ (PFIC). Ownership of a PFIC can lead to a higher marginal tax rate than expected, along with additional foreign reporting requirements to disclose your interest in these foreign investments to the IRS.
Would you like to know more?
If you would like to discuss how the above may affect you and your tax affairs, please get in touch with your usual Blick Rothenberg contact, or one of the team using the form below.
Personal tax is one of the most complex areas of wealth management and can significantly erode your wealth over time
Blick Rothenberg is considered to be market leaders in the taxation of non-UK domiciled individuals and offshore trusts, as well as cross-border personal taxation.
We have a strong base of clients in the UK and a broad and longstanding international focus too, acting for a large number of non-UK domiciled individuals and international families. So, we understand the complexities that US citizens face when living, working and operating businesses in the UK.
Whether you are a start-up entrepreneur, a wealthy family with complex affairs, or a business executive, our dual-qualified team of tax advisers will look after your US UK personal tax affairs as well as those of your business.
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