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Introduction
It has been a turbulent month for those of us in the US/UK community. Donald Trump supported by a fully Republican Congress will take over from the Biden administration in January. On this side of the pond, the Labour government has followed through with many of the tax changes that were headlined in the lead up to the Autumn Budget on 30 October 2024.
The impact of the Budget changes on the non-dom community living in the UK and for those who are coming to the UK has been widely discussed and it is clear that there is much careful planning to be done, much of it before 6 April 2025. For many non-doms coming to the UK, mitigating tax is a priority and this has influenced much of the recent negative commentary.
The position is, however, a little different for US citizens and green card holders as well as British expats living in the United States who are contemplating the recent events and thinking of returning to the UK. There are three reasons for this:-
- Firstly, unlike the majority of individuals, US citizens and green card holders face US taxation no matter where they are living. For this reason, where they hold assets abroad or become residents outside the US, any planning is initially focussed on putting them on a level playing field with everyone else, so they are not subject to double taxation.
- Secondly, the US federal gift and estate tax exemption is at a record level and is due to rise in January 2025 to $13.9m. This is considerably higher than the UK inheritance tax allowance of £325,000. Preserving the gap between these allowances has therefore been a key consideration for many when planning.
- Finally, the US/UK Double Taxation Convention and the US/UK Estate and Gift Tax Treaty (the ‘Estate Tax Treaty’) which overlay local tax laws provide another dimension and can provide opportunities for planning.
Given this different perspective, there are a number of planning considerations Americans and British expats who have UK assets or who are either UK resident or about to become UK resident need to consider.
A summary of the changes introduced can be found here, but this article will focus on the key changes and opportunities for Americans and British expats.
Foreign Income and Gains (‘FIG’) Regime
The remittance basis of taxation will be abolished at the end of this tax year and from 6 April 2025 a new Foreign Income and Gains (‘FIG’) regime will be introduced. Under this regime, if you have not been UK resident in any of the 10 previous years then you can shelter all your non-UK income and gains from UK tax for the first four tax years you are UK resident. You will need to file a tax return to claim the relief.
As US citizens and green card holders pay tax in the US in any event this may seem like a red herring. However, if you are moving to the UK this could be a big advantage as it could simplify your tax filing position as well as give you more time for future planning if you intend to stay in the UK for more than four years.
While the double tax treaties do much to prevent double taxation there are still some anomalies, for example:
- The US and UK authorities may disagree on the characterisation and source of certain income. LLCs, which remain popular in the US partly because the IRS treats them as tax transparent, are treated as opaque by HMRC. This means that the member is taxed in the US on their share of the LLC profits. The UK will then tax any distributions the member receives from the LLC without allowing credit for the tax paid in the US.
- Certain investments may be beneficial or benign in one country but punitively taxed in another. For example, investments within ISAs in the UK are tax free but the same benefit will not be available in the US. Equally investments in collective investment schemes in the UK will be treated as PFICs in the US and taxed at higher rates in the US.
The FIG regime can therefore provide a simplified position for the first four years of residence allowing extra time for planning albeit that all income and gains will need to be reported to claim the relief.
That said, certain planning still needs to be done before you move back to the UK. The FIG rules do not prevent a company you manage and control from becoming UK resident and falling within the UK corporation tax net. Many Americans and British expats will have trust structures in place and often act as trustees. The tax residency of a trust for UK purposes is dictated by the residence status of the trustees and so without careful planning trusts can accidentally become UK tax resident.
The FIG regime is also excellent news for those British expats currently classed as “formerly domiciled residents”, who are looking to return after an extended period of non-UK residence (at least 10 years). They will be able to make use of the FIG regime where previously the remittance basis was not available to them.
Inheritance tax
The government has confirmed that domicile will be removed as the key connecting factor for determining liability to inheritance tax in UK tax law. From 6 April 2025, you will be liable to UK inheritance tax on your worldwide assets if you become a long-term resident (‘LTR’) in the UK (i.e. if you have been resident in the UK under the statutory residence test for 10 out of the previous 20 years).
If you are not LTR you will only be subject to UK inheritance tax on your UK situated assets.
Once you are LTR, if you decide to cease being UK resident, you will remain subject to IHT on your worldwide assets for up to 10 years after leaving the UK. The length of this IHT ‘tail’ will depend on how long you have been UK resident prior to leaving. If you have only been resident in the UK for between 10 and 13 years the IHT tail will be 3 years. The tail increases by one year for every further year you have been resident until you have been UK resident for 20 years or more, at which point the IHT tail is fixed at 10 years.
The change is helpful as domicile is not the most objective concept and was fraught with uncertainty. The move away from domicile in UK domestic tax law is therefore positive news and should provide greater certainty.
However, the concept of domicile remains within the double tax treaties and it is not entirely clear at this stage whether the current domicile rules will apply to determine UK domicile under the Estate Tax Treaty or whether this will now be based on long term residency. There was a one-line reference in the Budget that “there are no changes to the treaties or how these operate” which on the face of it suggests that the current domicile rules will continue to be applied when determining UK domicile for treaty purposes, but the position is unclear. The concept of US domicile remains relevant within the US tax system.
In practical terms the changes mean that both US citizens and British expats can come back to the UK and provided:
- they have not been UK resident for 10 of the previous 20 years; and
- only remain resident for up to 10 UK tax years
they will not be subject to inheritance tax on their non-UK situated assets.
This also means that the gifting rules or the rules relating to the creation of trusts will not apply while you are not LTR.
As discussed above, this is excellent news for British expats who would currently be regarded as formerly domiciled residents, as provided they are not LTRs, they will also benefit from these rules on returning to the UK.
This is also good news for those only intending to be in the UK for no more than 10 years. For those who intend to be here longer, there are potential planning opportunities to mitigate UK inheritance tax, particularly around trusts, which may require action much earlier and are discussed below.
The Estate Tax Treaty also provides a further opportunity for planning.
Article 5(1) confirms that:
- if you are domiciled under the treaty in the US at the time of your death; and
- are not a UK national
Then your property (other than UK real estate and UK situated business assets) shall not be taxable in the UK.
If you are deemed to be domiciled in the UK and US under the terms of the Estate Tax Treaty, there are specific tie breaker provisions which can be complex to apply, but which will then give treaty domicile status to one country or the other. If it is to the US, then this can be a very helpful provision.
This provision can provide further cover for some US citizens and needs to be considered when planning as it preserves the gap between the current US estate and gift tax exemption at $13.61m and the UK’s nil rate band of £325,000.
Trusts – Inheritance Tax
Americans and British expats in the US will often have trust structures in place as part of their planning. There are extensive changes to the taxation of trusts for inheritance tax purposes.
Under current rules, trusts created by a settlor who is UK domiciled or deemed domiciled will fall within the relevant property regime (with a few very limited exceptions). In broad terms, this means that they are subject to charges of 20% when assets are transferred into the trust, and charges of up to 6% on 10 year anniversaries and distributions of capital from the trust. If the settlor can benefit from the trust, then they are deemed to have made a “gift with reservation of benefit” (GROB) and the value of the trust fund will also be subject to inheritance tax at 40% on their death.
A trust created by a settlor who is not domiciled or deemed domiciled in the UK and which does not contain certain UK assets is outside the scope of UK inheritance tax. These trusts are often known as ‘excluded property trusts’ and fall outside the relevant property regime. They also allow the settlor/grantor to benefit from the trust without being caught by the GROB rules.
Many trusts set up by US citizens are currently excluded property trusts and, for those moving to the UK, these trusts have been a key tool to protect non-UK assets from inheritance tax.
Excluded property trusts will be abolished from 6 April 2025. Where the settlor/grantor is a LTR the trust will be within the relevant property regime and, if they are also a beneficiary, will be subject to inheritance tax on their death under the GROB rules.
When a settlor who is an LTR ceases to be UK resident and the IHT tail comes to an end, there will be an exit charge of up to 6% on the value of the trust assets depending on when in the 10 year cycle the settlor ceases to be an LTR.
Trusts set up as of 30 October 2024 will not fall within the GROB rules, but will remain within the relevant property regime.
For those who are not UK resident, or who are resident in the UK for less than 10 years, who are creating a new trust, these trusts should remain outside the UK inheritance tax net. For practical purposes, if you are not UK resident, or intend to only be UK resident for less than 10 years, these rules should not impact your trusts.
Equally if you have created a US trust which benefits UK resident beneficiaries, these rules should not impact your trust.
For those who are or become LTRs these rules will have an impact. If you already had a trust in place as at 30 October 2024, then the GROB rules will not apply, but the relevant property regime (10 year anniversary charges and exit charges) will apply. However, a 6% charge every 10 years is considerably better than 40% on death, particularly as anniversary charges can be planned for, and so it may well be sensible keeping the trust in place. As these charges are unique to the UK, there is no relief under the Estate Tax Treaty.
However, the Estate Tax Treaty could also provide opportunities not open to non-US citizens to shelter assets in trust other than UK real estate or business interests.. Article 5(4) of the Estate Tax Treaty provides that:
“Tax shall not be imposed in the United Kingdom on [property held in a trust settlement] if at the time when the settlement was made the settlor was domiciled in the United States and was not a national of the United Kingdom.”
It is not quite clear whether “tax” in this context would cover not only the relevant property regime charges but also any charges as a result of a GROB, but if given its plain meaning it would seem reasonable to argue that it should do so.
This could be very helpful for those contemplating a move to the UK now or even post 6 April 2025, as these rules are applied at the time of a trust’s creation and funding. It could also be helpful for those who have trusts that were put in place prior to 30 October 2024.
It is unlikely to be helpful for dual nationals, or Americans who have been UK resident for quite some time, as the provisions to qualify as US domiciled under the treaty are narrow and the tie breaker provisions where you are nominally domiciled in both countries complex.
It is not clear how HMRC will view the treaty or whether UK domicile for treaty purposes will use the current domicile rules or the new long term residence rules and so care needs to be taken here.
In view of the above, if you have existing trusts in place it would be sensible to take UK advice before revoking or amending and restating them.
Trusts – Protected Status
Under current rules, any income or gains arising within a non-UK trust are not subject to UK income tax or capital gains tax while they remain within the trust even if the settlor is UK resident and a beneficiary of the trust (making the trust ‘settlor interested’).
From 6 April 2025, income and gains arising within a settlor interested trust where the settlor is UK resident and not within the FIG regime, will be subject to UK income and capital gains tax in the hands of the settlor whether or not they receive a benefit.
This should not be a problem for US citizens. Most US trusts are designed to be grantor trusts where the settlor is taxed on the income and gains within the trust in the US. Since 2017 many US citizens have ensured that any trust is “tainted” so that the protected settlement rules do not apply, so that the tax treatment is aligned in both UK and US thereby allowing them to claim the foreign tax credits.
Temporary Repatriation Facility and Asset Rebasing
If you are already UK resident and have claimed the remittance basis then you will qualify for the new Temporary Repatriation Facility (‘TRF’). This allows foreign income and gains which were protected by the remittance basis to be brought into the UK at a flat 12% tax rate. This will apply between 6 April 2025 and 5 April 2027. Between 6 April 2027 and 6 April 2028, the rate of tax applied will be 15%.
This is a good opportunity to bring income and gains to the UK if you are intending to remain here in the long term. However, you should seek advice as this could have an impact when calculating your foreign tax credits under the treaty and so anyone looking at this should take advice.
If you are UK resident and:
- have claimed the remittance basis at some stage between 6 April 2017 and 5 April 2025; and
- were not domiciled or deemed domiciled in the UK before 6 April 2025,
then you will be able to “rebase” your personally held foreign capital assets to their market value as of 5 April 2017.
Note, this does not apply to assets held in trust or held via a company; assets in a grantor trust or an LLC will not be eligible even if they are tax transparent in the US.
This will be useful for anyone who previously claimed the remittance basis but who is not eligible to claim relief under the new FIG regime as set out above.
The special relationship
The Autumn Budget changes are significant, but there remain unique planning opportunities for Americans and British expats, as well as increased certainty thanks to the replacement of the UK concept of domicile.
The cultural and economic ties between the UK and US are extensive and in these uncertain times the UK remains an attractive and stable place to be for US citizens.
As ever, it is crucial to take timely, specialist advice in this area and to keep matters under review.
Should you wish to discuss any of the issues raised in this article, please contact James Frampton.
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