UK tax considerations for US persons relocating to the UK

With overseas travel on the rise, 2023 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, an attractive tax regime for non-UK domiciled arrivals (for now at least), 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 three per cent for buyers who already own a residential property. For non-UK resident US buyers, that can mean rates as high as 17 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. However, with a UK election expected in 2024, an incoming Labour government has threatened to increase rates further for non-UK residents and prohibit them from acquiring certain ‘off-plan’ apartments.

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 28 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 2023, a US spouse can make gifts of up to $175,000 (scheduled to increase to $185,000 for 2024) 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. Due to recent increases in 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

A non-UK domiciled US person’s estate will at death be exposed to UK inheritance tax (IHT) in respect of UK situated assets, including any UK home. UK property is 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 2024 this is $13,610,000 per individual, or $27,220,000 for a married couple, up from $12,920,000 in 2023). (Note that the federal estate tax exemption is due to halve to somewhere between $6-7 million per individual from 2026. Certain US persons therefore have a time-limited opportunity to mitigate exposure through gift / trust planning in advance of the exemption ‘sunset’ and should take advice now.)

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).

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.

US persons should consider the most tax-efficient basis on which to be taxed whilst in the UK: UK tax on their worldwide income and gains as they arise or claiming the “remittance basis” of tax. Under this special tax regime, available to certain non-UK domiciliaries within their first 15 years of UK residence, a UK-resident US person only pays UK tax on their foreign income and gains to the extent they ‘remit’ those funds to the UK. However, in many cases, counter-intuitively, the remittance basis is not the answer. That is due to the scope of tax credits being limited where tax is deferred in one jurisdiction to a later tax year. Instead, “arising basis” taxation and carefully timed tax payments often provide the best means to avoid double taxation via the use of tax credits.

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. Typically, this may require restructuring an investment portfolio and establishing a pot of “clean capital”, before becoming UK resident, which can be drawn on tax-free whilst they are in the UK.

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.

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.

Originally published by IFC Review on 10 January 2024.