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The UK’s March 2024 Budget: how the proposed new tax rules will work for US-connected clients

Since the UK government made its shock Budget announcements on 6 March 2024, much has been made about how this would affect the 37,000 people living in the UK and paying tax on the remittance basis. This includes our detailed and technical commentary here

In this note, we explore the opportunities that the Budget announcements present specifically for our US-connected clients, and outline a few risk areas to keep under review. 

To summarise the changes:

  • A new four-year special tax regime will be introduced, under which qualifying individuals will be exempt from tax on their foreign income and gains for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK.   After this four-year period is over, all income and gains (including those realised within trusts) will be taxable in the UK.
  • Domicile will no longer be a connecting factor for inheritance tax (IHT).  Instead, IHT will be tied to residence – with a proposal that it applies to worldwide assets after 10 years of residence, with a 10 year “tail” after a UK resident leaves the UK.   The Government intends to consult on the details of this particular change. 

As with all of the commentary in this area, this note is based on the policy paper that was issued at the same time as the Budget announcements.  As yet there is no draft legislation and it is not yet clear exactly how or when any changes will be implemented. 

Go your own way 

Turning first to how these proposed new rules will affect clients originally from the UK, who have moved to the US: one of the issues that many of these people have commonly faced is understanding their ongoing relationship with IHT. As IHT is currently connected to domicile, an individual will first need to be certain that they have lost their domicile in some part of the UK before they can be sure that their worldwide estate does not continue to be exposed to IHT. Over the years, this has become trickier as HMRC has been increasingly willing to challenge individuals over their domicile.   

IHT applies both on death and also when assets are moved into trust. This latter point is particularly relevant to those in the US, where it is common to plan with trusts. For expats, the tax risks of creating any of these common US-focused trusts can be intolerable under the current regime. If the new 10 year “tail” (or some iteration of it) is introduced, then it will be easier for those leaving the UK to plan with certainty. More details about the opportunities for expats are in our note here

In fact, some people moving to the US may have an additional advantage over most. One of the key criticisms of the new proposals is that the 10 year IHT “tail” is too long. For those who can take advantage specifically of the US/UK estate tax treaty, it may be possible to shorten this tail. If certain conditions are met, they may be able immediately to limit their IHT exposure to their UK real estate and business property only, and there will be no tail of IHT on all other assets. As one of the relevant conditions includes not being a UK citizen, this will only work for some people. But for US citizens moving back to the US, this could be a particularly helpful provision.

Time (doesn’t) stand still

US taxpayers may be familiar with the idea that the generous estate and gift tax credit amount (currently $13.61m at Federal level) is due to halve in 2026. Estate planners have been encouraging US taxpayers who will be affected by this reduction to make gifts into trust before the end of 2025. 

However, if those US taxpayers are also UK-connected, they may need to accelerate such gifts. Under the Budget proposals, the Government have announced an intention to allow any qualifying trusts created before 6 April 2025 to continue benefitting from the current tax regime.  This means it remains possible for non-UK domiciled individuals (who are also not UK deemed domiciled) to shelter their non-UK assets in a trust from inheritance tax in the long-term. Any trusts created after that date will switch into the new regime in two crucial ways: (i) as noted above, the connecting factor for IHT will no longer be domicile, but is instead likely to be the new 10 year residence test; and crucially (ii)  whether non-UK assets of trusts are exposed to IHT will be determined by reference to the tax status of the settlor at the date of charge, for example the settlor’s death or on any 10 year anniversary. 

Once again, the US/UK estate tax treaty might assist here: for those who are specifically domiciled in the US under the terms of the US/UK estate treaty, and not a UK national, it may be possible for many assets (other than UK real estate and UK business assets) that are held in trusts created even after 6 April 2025 to be sheltered from IHT. This treaty provision is only likely to assist a limited group of people, and the application of the treaty domicile tie-breaker provisions are not always straightforward. So, although this treaty provision is extremely generous in the right circumstances, it should be treated with caution. 

Therefore, for any UK-connected, US taxpayers who are waiting until the second half of 2025 to use up their current US estate tax exemption, the timeframe for planning could be 10 months shorter than currently anticipated. 

T’aint no thing

Despite the many advantages of using trusts for planning, they have always been tricky for US taxpayers living in the UK. It is notoriously difficult to arrange for the UK and US income tax treatment of trusts to match up, with the US/UK income tax treaty providing very little assistance. Without thoughtful planning – either in how the trust is established or in how it is invested – this can result in double taxation.  

Since 2017, one option that US taxpayers living in the UK have used is to “taint” certain types of grantor trusts. If done properly, this has allowed the US and UK income tax treatment of these trusts to line up, making it easier to claim foreign tax credits, and therefore reduce the risk of double taxation.

Under the proposed new regime, this type of planning will become even easier. During the initial four-year period, income and gains generated on non-UK assets within the trust will simply not be subject to UK tax. After the four-year period, we anticipate that the settlor will pay UK tax on all trust income and gains; and this could match up neatly with the grantor trust tax rules in the US. With suitable planning, this could mean that the US and UK income tax treatment of many types of common trusts could align. 

After the gold rush 

In fact, the proposed four-year initial special tax regime works well to “buy” time for certain types of pre-immigration tax planning opportunities that can often be missed.  

For example, a well-advised US taxpayer moving to the UK might collapse their trusts before arrival, to avoid the complicated UK anti-avoidance rules relating to trusts. In the worst case, if the trusts are not collapsed before becoming UK tax resident, these anti-avoidance rules could result in UK taxes being paid on income / gains generated within a trust many years prior to the move to the UK. 

Similarly, a US taxpayer entering the UK tax system should consider reviewing their investment strategy before moving. Many common types of investments – mutual funds, municipal bonds, as examples – can be taxed punitively in the UK.  Presently, the only way of avoiding punitive taxes on any disposals after becoming UK tax resident relies on the current, complicated remittance basis regime.  

Of course, not every US taxpayer is well-advised and these types of pre-immigration planning opportunities can be missed.  Under the proposed new regime, all will not be lost.  Instead of having to complete all pre-immigration tax planning before arrival, US taxpayers can use the initial four-year period, during which non-UK income and gains are not subject to UK tax at all, to restructure many of their personal assets and holdings so that they work within the UK tax regime.  

Under pressure

However, although certain types of investments and holdings can be restructured during the initial four years, this will not work for everything. When US citizens move to the UK, this can cause associated entities such as trusts and companies to become resident in the UK at the same time. There is no specific relief in the UK tax code for such accidentally imported entities. 

Once these entities have become UK tax resident, their profits (if companies) or income/gains (if trusts)  will become subject to UK tax. Even more dramatically, if these entities subsequently leave the UK (eg alongside the taxpayer when they leave), the entities will face a mark-to-market exit tax on their assets.  

This risk theoretically exists for anyone moving to the UK from abroad, but in practice it is a particular issue for people arriving from the US, where managing a single member LLC or acting as trustee of a grantor trust is common. In the UK, the starting point for an LLC is that it will be taxed as a corporation with its own legal personality; and a grantor trust will similarly be its own taxable entity. 

Nothing in the proposed rules would change this risk for entities, including the four-year special regime. So US taxpayers moving to the UK with these types of common entities will still need comprehensive advice before they move. 

All about that bas[e]

The proposed transitional provisions will allow previous remittance basis users to automatically rebase their long-held personal assets to their 2019 values. In doing so, taxpayers switching into the new regime will potentially eliminate a significant amount of latent capital gain.  

By contrast, assets belonging to those moving to the UK are not automatically rebased. This is likely to mean that a person moving to the UK in the future, and making a disposal of a long-held asset will pay capital gains tax on the entire gain. The automatic rebasing to 2019 values will not apply to them. This could mean that some types of traditional pre-immigration planning for US taxpayers moving to the UK, including manually rebasing assets prior to residence, will remain important. 

Crucially, the transitional rebasing relief appears only to apply to (i) personally held assets (ie not assets held in trusts or companies) that (ii) belong to someone who has previously claimed the remittance basis. US taxpayers should take specific note of both of these conditions:

As noted above, it is common for US taxpayers to have transferred investments to an entity such as an LLC or a grantor trust. Even if these are tax-transparent in the US, they are unlikely to be treated as such for the purposes of the rebasing relief. 

As US taxpayers are anyway taxed in the US on their worldwide income, they do not always claim the remittance basis of taxation in the UK. It seems as if this will therefore preclude them from taking advantage of the above relief. US taxpayers who are not yet deemed UK domiciled still have the opportunity to claim the remittance basis for the UK 2023/24 or 2024/25 year – they will need to weigh up the benefits of doing so against the potential capital gains tax on any future disposals (after taking into account any US taxes that would also be payable on the disposal).  

Should I stay or should I go?

After the initial four-year period is over, US taxpayers will have more choices than most.  

As they will already be paying US taxes on their worldwide income (often including that generated within grantor trusts), many US taxpayers will be prepared similarly to pay UK taxes. As noted above, they will ideally have ensured that their financial strategies – eg investment decisions and holding entities – are lined up in both the UK and the US. 

For others, it will make more sense to ensure that they do not remain UK tax resident.  The UK statutory residence test, though complex, makes it possible to predict year on year what is needed to remain non-UK resident. And the US/UK income tax treaty will give taxpayers further opportunity to ensure that, for treaty purposes at least, they are non-UK tax resident. This could give the US exclusive taxing rights to certain types of income and capital gains, meaning that the taxpayer will not necessarily be constrained by UK tax planning.  

In fact, the US/UK income tax treaty should remain a valuable planning tool even during the proposed initial four-year period. Even though a UK resident US taxpayer will not need to pay UK taxes, they can still benefit from the treaty (including, for example, the reduced 15% US withholding tax rate on dividends). 

Thank U, next

The impact of these proposals on individuals will inevitably be specific to their particular circumstances, but in many cases for US / UK connected individuals the rules (if enacted as proposed) will provide significant planning opportunities and certainty of tax treatment. This is particularly true for British expats living in the US long-term. That said, we will need to watch closely how the proposals evolve over the coming months (and in particular the IHT proposals which are subject to consultation). As always, it will remain vital for individuals to take specialist advice at an early stage to mitigate the risks and make the most of the planning benefits presented by the new tax landscape looming on the horizon.

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