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27 March 2023

Six tax and estate planning pitfalls US citizens should be aware of before relocating to the UK

US citizens looking to relocate to the UK face a complex web of tax consequences, however, following advice on coordinated cross border tax and estate planning can go a long way in making the move successfully. Private wealth expert Robert Brodrick shares six of the most common pitfalls that US citizens face when relocating to the UK.

For wealthy individuals the UK remains an attractive place to live: good schools, rich cultural heritage, and particularly for your first 15 years of residence, an attractive tax system whereby if you are non-domiciled and are able to take advantage of the Remittance Basis of taxation you can protect your overseas income and gains from tax in the UK. However, for any non-domiciliary who is also a US citizen, moving to the UK brings with it a complex web of tax consequences with filing requirements in both the US and the UK. The remittance basis is still available although in practice it is only worth claiming in limited circumstances, or if your stay in the UK is going to be short, because whilst the Remittance Basis will protect income and gains from tax in the UK, the same income and gains are likely to be taxable in the US.

Whilst each individual’s circumstances are different, here are a few common pitfalls to avoid.

1.       When is a trust not a trust?

In order to avoid probate (which can be a lengthy and expensive process in the US), US advisers routinely recommend that their clients transfer their assets into a lifetime trust known as a ‘revocable’ or ‘living’ trust (or a ‘grantor trust’).  When the individual dies, there will be no probate as the assets are already held by trustees.  For US purposes, this type of trust is almost always transparent for tax purposes.

But what if the Grantor has been living in the UK for more than 15 years and has become ‘deemed domiciled’?  Any transfer into a revocable trust like this will be an immediately chargeable transfer for Inheritance Tax purposes because although the trust may be transparent for US purposes, it is likely to be a ‘settlement’ for UK tax purposes.

2.      Importing and exporting trusts

If a US based individual with a revocable trust moves to the UK, this can also present other traps. Often, the trustee of a revocable trust will be the grantor and his/her spouse – if they both move to the UK, and all the trustees are UK resident, the trust will become resident in the UK for tax purposes. This means that the remittance basis will not be available unless the trust has been drafted so that it is actually a ‘bare trust’ for UK purposes.

3.       Trust distributions

Sometimes, where children or grandchildren have been born in the US and have acquired US citizenship at birth, but the rest of the family are non-US, the parents or grandparents are advised to create a foreign grantor trust. This can be very advantageous from a US perspective, but where the beneficiaries have become UK resident, there can be a mis-match because whilst distributions will not be subject to US tax in the hands of the beneficiaries, they will still be subject to UK tax and reporting. This is one of the situations where the existence of a trust can create a tax charge where none would exist if the assets had been held by the parents/grandparents personally.

4.      Onward gifts

Another potential pitfall is a rule that was brought in on 6 April 2018 and catches onward gifts from non-resident trusts. Take the example of the non-US and non-UK grandparent who creates a foreign grantor trust to protect their US children/grandchildren from US tax.  If the grandparent receives a distribution and uses this to pay the grandchildren’s school fees, this will be taxed as if the grandchild had received the money directly from the trust.

5.      UK Residential Property

Trustees are often understandably nervous about making large distributions to beneficiaries and if a beneficiary of a US trust wants to buy a house, the Trustees’ preferred solution is often for the trustees to buy the property, or for them to provide the beneficiary with a loan.  Both of these will expose the trust to tax exposure and reporting obligations in the UK.  It will almost certainly be better to anticipate the fact that a beneficiary will want to buy somewhere to live before they move to the UK and if possible make distributions to them before they become resident, and then deal with any non-tax considerations (such as divorce protection) by ensuring that the beneficiary enters into a pre or postnuptial agreement.

6.      Practical issues

Finding an investment manager who is able to navigate the US and UK rules is difficult, and you still need to be careful before investing in things like ISAs and pensions to make sure that the contributions that you make qualify for relief in the right place. Similar care needs to be taken with charitable contributions – the rules in the US and the UK are not the same, and what qualifies for relief in one country may be taxable in the other.  You may want to consider setting up a dual qualified charity that will ensure that you can claim relief in both the US and the UK.

Above all you will need to appoint an accountant who is familiar with US/UK tax reporting.

For more information please contact Robert Brodrick or any member of the Private Client Department.

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Robert Brodrick
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Frederick Bjørn
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