WEALTH MANAGEMENT

Timing Is Everything – Key Dates To Watch Out For As A US Citizen In The UK

Whether you have been resident in the UK for a lifetime or are a new arrival, there can be many important dates from a tax perspective for one to consider as an American in the UK. With sufficient prior planning and foresight these important dates should not prove a problem, but it is important to be aware of them, so they do not result in any nasty surprises.

Arising/Remittance Basis of Taxation:

Between your first and seventh year of UK tax residency, non-domiciled individuals have the opportunity to elect to pay UK taxes on the remittance basis without paying a tax charge associated with the election. Following year seven and until year sixteen, an individual can continue to elect the remittance basis, but doing so comes with an additional charge of either £30k or £60k depending on the length of residency. Paying UK tax on the remittance basis means that individuals pay UK taxes on their UK sourced income and gains as well as on any assets they bring onshore to the UK. This can be helpful where individuals may have large balances in the US or offshore, and can therefore shelter these from ongoing UK tax for a time. Whilst an individual electing to pay UK taxes on the remittance basis can reduce their overall tax position, this can also create wrinkles down the line should the individual want to use their offshore assets in the UK, as it can create nonremittable pools of capital offshore. This can mean that the assets held outside of the UK could be subject to an additional UK tax when bringing them onshore to spend in future years. Therefore, if you intend to stay in the UK for the long-term, it is essential to consider the cost/benefit of electing to pay tax on the remittance basis versus paying tax in the UK on an arising basis. We recommend talking through your options with a tax professional.

Another key aspect is considering how your tax position will change once you switch from the remittance basis to the arising basis of taxation. As mentioned above, after seven UK tax years there is an annual charge payable to continue paying tax under the remittance basis, and for many individuals it often makes sense to begin paying tax on the arising basis at this stage. This means that your worldwide income becomes subject to UK taxes as it arises. Before this happens, it is therefore key to review any offshore holdings to ensure they are tax efficient from a UK perspective. If you have not restructured your investments early on in your residency, it is often prudent planning to sell down any tax inefficient investments from a UK perspective before you begin paying tax on the arising basis and at this juncture restructure into investments that will be tax efficient from both a UK and US perspective; for example, US mutual funds with UK reporting status. Doing this ahead of moving to the arising basis of taxation can save you significant taxes from a UK perspective, so it is certainly one to think about and plan for in advance.

Paying Your UK Taxes Early:

If at some stage in your UK residency you do pay taxes on the arising basis, you will be filing taxes in both the UK and the US. Fortunately, under the UK/US tax treaty there are provisions in place to prevent you paying double tax, however, these must be carefully navigated to make sure the provisions can be applied. As you will already be familiar, the US tax year runs from 1st January to 31st December. However, the UK tax year runs from 6th April – 5th April. Therefore, it becomes important to ensure that you pay taxes at the correct time in both jurisdictions as it will allow you to claim foreign tax credits under the treaty and ultimately prevent double taxation. Your UK neighbours will have until 31st January each year to pay taxes for the previous tax year. For Americans in the UK, it is often beneficial to pay your UK taxes a month before the deadline instead, aiming for December 31st. This will then mean that you can deduct your paid UK taxes from your US returns for that year and allow the treaty to work as intended.

Deemed Domicile:

Once you have been a UK tax resident for more than 15 of the last 20 years, you will be well and truly cemented in British lifestyle. With this also comes a change to your tax position, as from this time you will be considered deemed domicile in the UK. This is an important milestone when it comes to inheritance tax, as from this juncture onwards your worldwide assets will be subject to UK inheritance tax. For Americans, this can be particularly painful as the estate allowances in the UK are significantly different from the US. As of today, the US has a lifetime gift and estate allowance of $12.92m per person after which an inheritance tax charge of 40% will be applied to your remaining estate. The UK inheritance tax allowance, known as the nil rate band, is only £325,000 or £500,000 (depending on whether you qualify for the extra main residence nil rate band) after which your estate will be subject to a 40% tax charge on the remaining estate. It is therefore important to spend some time on estate planning and consider how your estate is best structured from both a US and UK perspective. Appropriate areas that may be considered include lifetime gifting, settling a trust prior to becoming deemed domicile, or taking out a whole of life insurance policy. Considering these potential liabilities in advance will allow you to ensure that you have peace of mind that your estate is structured efficiently should the worst happen.

There can be many obstacles to navigate as a US person resident in the UK, so being aware of the key dates and timelines is crucial. Being conscious of changes to your tax status in advance can allow you plenty of time to prepare and make any changes to prevent yourself from being caught out. If only we had the same foresight over the British weather!

Emma James

Emma James is a Wealth Manager at MASECO Private Wealth specialising in cross boarder financial planning and investment management.

Email: Emma.james@masecopw.com

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