UK tax considerations for US persons relocating to the UK
2025 has seen increasing numbers of US clients exploring relocation to the UK. The UK remains a competitive place for US persons. Particular draws include historically low exchange rates, a relatively attractive tax regime for US citizens arriving in the UK for the first time (for the first four years of UK residence), a leading international financial and business hub located in a convenient geography and time-zone, high quality schools and universities, and diverse visa and housing options.
However, at the interface of the US’s citizen-based, and the UK’s residence-based, tax systems, arise a volcano of double-tax and mismatch traps for the unwary. In advance of a move, US citizens need expert advice from both sides of the pond and a laser focus to negotiate evolving UK tax complexity and myriad US-UK cross border issues. This article touches on some of the many UK tax considerations for US persons moving to the UK, with a focus on buying a UK home.
Buying A UK Home
Acquisition
UK Stamp Duty Land Tax (SDLT) is charged on purchasers of UK homes, by reference to the purchase price. Rates are hiked by two per cent for non-UK resident buyers (note SDLT has its specific residency rules) and five per cent for buyers who already own a residential property. For non-UK resident US buyers, that can mean rates as high as 19 per cent. Fortunately, the two per cent non-resident surcharge can be reclaimed, broadly, where the buyer spends 183 days or more in the UK, in one of the years either side of the transaction.
Disposal
UK capital gains tax (CGT) applies on gains realised on a disposal of a UK home by a US person at either 18 per cent or 24 per cent (at current rates), depending on the person’s other income and capital gains in the relevant year. However, where the property is used as the buyer’s main residence, full relief from CGT is possible. Relief is available where the owner is UK resident and in limited (and rare) circumstances where the buyer is non-UK resident.
Equivalent US tax relief on the same gain is less generous. US tax on gains realised by US persons typically have relief capped at $250,000, subject to relief for double tax under the US / UK double tax treaty. Given the mismatch in US and UK reliefs, where couples comprise one US spouse and one non-US spouse, it may be more efficient for the property to be owned by the non-US spouse solely. However, where the US spouse is contributing to the purchase price, structuring ownership in this way may result in a gift for US transfer tax purposes. In that case, mitigation might involve the US spouse gifting fractional interests in the property annually to the non-US spouse. (For 2025, a US spouse can make gifts of up to $190,000 to a non-US spouse each year, free of US federal gift tax). This may have UK tax implications, but over time such gifting can improve overall tax efficiency.
Sterling mortgages represent a particular trap for US persons. That is because, in the US, a foreign mortgage repayment can result in a foreign currency gain or loss. Depending on the value of the US dollar against the pound, there is scope for a US person borrower to be subject to an exchange rate gain, when, for example, monthly capital repayments or repayments of capital related to refinancing or re-mortgaging are made.
Tax At Death
Domicile is no longer a connecting factor for UK inheritance tax (IHT). Instead, the degree of an individual’s exposure to IHT is now determined by whether the individual qualifies as a “long-term resident” (or LTR). Under the new regime, LTRs are exposed to IHT with respect to all assets, whereas non-LTRs will generally be exposed to IHT with respect to UK situated assets (including any UK home) only. By default, an individual qualifies as an LTR under the new regime if they have been UK resident for at least ten of the previous twenty UK tax years. In practice, this means US citizens, newly arriving in the UK, will need to clock up no more than nine years of UK residence, to avoid exposure to worldwide IHT.
For as long as a US citizen remains non-LTR, the value of UK assets (including any UK home) will be subject to IHT at a flat rate of 40 per cent on the value that exceeds the deceased’s available ‘nil rate band’ amount (NRB) of up to £325,000, subject to certain reliefs and exemptions. This NRB amount can increase in certain circumstances but is dwarfed by the equivalent US federal estate tax exemption amount (for 2025 this is $13,990,000 per individual, or $27,980,000 for a married couple; and $15,000,000 per individual, or $30,000,000 for a married couple, from 2026). Due to the disparity in the UK nil rate band and the US federal estate tax exemption amount, in some cases, the estate of a US citizen may be subject to a significant amount of IHT, even where there is no US estate tax liability at all.
Ownership
It will usually be most tax efficient from a UK perspective to own a UK home personally, rather than through a corporate or trust structure (in particular, since 2017 non-UK companies no longer act as an IHT exposure blocker for UK residential property). The main options to address IHT mitigation now focus on commercial mortgages taken out to fund the acquisition (which can reduce the value of the assets for IHT purposes), life insurance and tax efficient estate planning.
Mortgages And Insurance
As borrowing costs increase, however, a commercial mortgage represents an increasingly expensive option, and private borrowing from individuals and trusts used to acquire UK residential property is unlikely to improve the overall IHT position. As a result, life insurance (depending on the age of the owner) can be a simple and cost-effective option. However, careful planning is required to ensure that the policy is structured and the payment of premiums co-ordinated so as to exempt the life policy death benefits from US estate taxes and IHT. For US citizens, policy-holding trusts will usually take the form of US irrevocable life insurance trusts or ILITs.
Wills
Perhaps the most cost-effective IHT mitigation strategy is to secure a deferral of tax until the death of a surviving spouse through carefully designed wills. In the US / UK context this is a complex area, not least because the conditions for deferral differ between the jurisdictions and can result in double tax without relief.
Take an example: A US spouse with wealth above the US estate tax exemption amount predeceases a UK spouse. On that death, US estate tax would be due but, in the UK, the spousal exemption from IHT applies, deferring the IHT liability until the death of the non-US spouse. As the liabilities arise at different times, there may be no relief for double taxation. A deferral of US estate tax in this scenario would likely require that a specific type of US “qualified domestic” trust is incorporated into the Will. Once deferral of tax is effective in both jurisdictions, relief from double taxation should then be available under the US / UK estate tax treaty.
Other Considerations
Further considerations that US persons should get expert advice on before a move are summarised below.
Trusts
US persons with connections to trusts should get advice due to a number of traps which can arise once they become UK resident. For example, a US person may be the sole trustee of a US revocable grantor trust (also known as a living trust and oft used for US estate planning purposes to circumvent US probate). However, by moving to the UK, they may bring the trust within the scope of UK tax due to the change in their personal tax residence. They may also make the trust registerable under the UK’s trust register (although there is an argument that certain grantor trusts, which do not impose fiduciary obligations on the trustee, are not English law trusts at all and so do not need to be registered). Depending on the circumstances, a well-advised US taxpayer moving to the UK might consider winding down their trusts before arrival, to avoid complex UK anti-avoidance rules relating to trusts. Such rules may result in UK taxes being paid on income and gains generated within a trust many years prior to the move to the UK, without credit being given for historic US taxes paid on the same income.
Investments, Businesses and Basis of Taxation
US business owners should take particular care not to inadvertently bring their non-UK companies within the scope of UK corporation tax by exercising control over, or acting as a shadow director of them, whilst in the UK. Avoiding such “central management and control” from the UK is achievable but requires care.
A US person should review their sources of wealth, whether from trust distributions, gifts, company dividends or investments profits, and conclude with their advisers how they will fund their UK lifestyle in the most tax efficient way.
The restructuring of investments pre-arrival is often crucial, since certain investments which are advantageous from a US tax perspective may suffer adverse UK tax treatment. Take mutual funds: they will typically have non-reporting tax status for UK tax purposes, so that any gains realised on such funds are taxable at higher UK income tax rates. Under the rules in force pre-6 April 2025, avoiding higher rates of UK tax on any disposals after becoming UK tax resident relied on the complicated remittance basis regime. Following the abolishment of the remittance basis regime with effect from 6 April 2025, US taxpayers will need to consider their alternatives carefully with their advisers.
Holdings in LLCs can be problematic too: The UK will likely treat LLCs as opaque, but the US as transparent, for tax purposes. That means the US person shareholder will be taxed in the UK on distributions from the LLC but in the US on the LLC’s profits. With tax considered paid on different sources of income, the UK may give no credit for the tax paid in the US.
Where US taxpayers are not well-advised, and pre-arrival planning opportunities are missed, the UK’s new four-year special tax regime (see: Transatlantic shockwaves herald sea change in UK tax treatment of US-connected individuals) can provide individuals with relief in certain circumstances and allow more time to carry out some pre-immigration tax planning – 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 some of their personal assets and holdings so that they work within the UK tax regime.
That said, although some investments and holdings can be restructured during the initial four years, this will not work in every case. For example, as noted above, when US citizens move to the UK, their connected entities such as trusts and corporations may become UK resident at the same time. Once UK tax resident, it is often very challenging to mitigate UK tax on these structures, even in the context of the new four-year special regime and inadvertent UK tax charges can arise.
As a result, US taxpayers moving to the UK with these types of common entities will still need comprehensive advice before they move.
Originally published by IFC Review on 10 January 2024.
