UK TAX FOR US PEOPLE

In this note, we provide an overview of the UK tax system for individual clients with US connections and outline a few opportunities and risk areas to keep under review.

To summarise the key UK tax rules for individuals:

• Individuals moving to the UK who have not been resident in any of the previous ten tax years can elect to make use of a beneficial tax regime (the FIG regime), exempting them from tax on their foreign income and gains for their first four tax years of UK residence, even if the income and gains are brought to the UK. After this four-year period, all income and gains (including those realised within non-UK trusts and other entities) will be taxable in the UK.
• An individual’s exposure to UK Inheritance Tax (IHT) is determined by whether the individual is a “long-term resident” (LTR). LTRs are exposed to IHT with respect to their worldwide assets, whereas non-LTRs are generally exposed to IHT with respect to UK situated assets only. Typically, an individual will be an LTR if they have been UK resident for at least ten of the previous twenty UK tax years.
• An LTR remains exposed to IHT for a period after ceasing to be UK resident. The length of this IHT “tail” depends on how long the LTR was resident in the UK in the previous 20 tax years. If the LTR was UK resident in all 20 years, the IHT tail will be the maximum ten tax years. The tail will be shorter for those who, prior to leaving the UK, were resident for fewer than 20 tax years. Those UK resident for between 10 and 13 tax years will continue to have LTR status for three tax years from the date of departure from the UK. The tail then increases by one tax year for each additional year of residence up to the maximum ten-year period.

IHT and Long-term residence

Turning first to clients moving from the UK to the US: one of the issues that many of these people commonly face is understanding their ongoing relationship with IHT. As mentioned above, this turns on whether an individual is an LTR and/or has UK situated assets.

IHT applies both on death and during lifetime, for example, 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.

One of the key criticisms of the IHT “tail” rule is that the length, at a maximum of ten tax years, is too long. For those who can take advantage of relief under the US/UK estate tax treaty (the “Treaty”), it may be possible to avoid the IHT tail and limit IHT exposure to UK real estate and business property only. For US citizens moving back to the US, this could be a helpful provision (provided they are not a UK citizen – one of the conditions which must be satisfied for the relief to apply). 

The IHT treatment of trusts

It is common for US individuals to create trusts as part of their estate planning – for example, lifetime revocable grantor trusts to avoid US probate. However, any such individuals who are also connected to the UK should take care.

Depending on its terms, the trust may be treated as a substantive trust for UK tax purposes with UK tax consequences following from there.

When assets are settled on trust, an immediate IHT charge at an effective rate of 25% may arise if the settlor is LTR at that point or transfers UK assets into trust and, in either case, the value transferred exceeds the IHT-free amount of £325,000 (significantly lower than the generous US federal estate and gift tax credit amount of $15m for 2026). This might be relevant, for example, where someone has moved from the UK to the US and carried out relatively basic estate planning, without taking appropriate UK advice.

If the settlor is LTR at certain points in the lifetime of a trust, this can also trigger IHT charges.  The most relevant occasions of charge, in broad terms, are:

• ten-year anniversaries and distributions from the trust (collectively, “relevant property charges”): charges of up to 6%, depending on the circumstances, if the settlor is LTR at these points (even if the settlor is excluded from benefitting from the trust). In addition, if the settlor is LTR on their death, the trust’s exposure to relevant property charges becomes fixed on the settlor’s death and such charges will continue to apply for the lifetime of the trust.

Relevant property charges are peculiar to the UK tax system, with no US equivalent.  Therefore, if they do apply, they cannot be credited against any other US transfer taxes such as GST or estate tax;

• on the settlor ceasing to be LTR (at the end of the “tail”): a charge of up to 6%, depending on the length of time since the last ten-year anniversary.

Again, as there is no US equivalent of this charge, it cannot be credited against any US taxes due;

• on the settlor’s death, if they have “reserved a benefit” in the trust: a 40% charge. Where the settlor is able to benefit from the trust, the trust assets are deemed to be part of the settlor’s estate at death for IHT purposes.  The meaning of reserving a benefit is broad and complex but will capture trusts where the settlor is a beneficiary, including almost all grantor trusts.

Notably, certain trusts which were funded before 30 October 2024 with non-UK assets are exempt from this rule.  Given how valuable this exemption may prove, US persons should take advice before restructuring any such trusts to avoid the inadvertent loss of this IHT benefit;

• when certain types of “life interest” trusts terminate: a 40% charge, if the settlor or the income beneficiary are LTR at the relevant time. Again, there is an exemption for certain “life interest” trusts which had IHT-exempt status before 30 October 2024.  Given the nature of many grantor or marital trusts, this rule should be treated with extreme care.

The Treaty may relieve some of the above IHT charges for those who are domiciled in the US under the terms of the Treaty, and not a UK national – noting that an individual’s common law domicile under English law and their LTR status may be relevant in deciding where they are domiciled for the purposes of the Treaty. In such cases, it may be possible for many assets (other than UK real estate and UK business assets) that are held in trusts created even on or after 30 October 2024 to be sheltered from IHT.

Establishing an individual’s Treaty domicile is not always straightforward. Whilst treaty relief can be extremely generous in the right circumstances, it should be treated with caution – particularly considering the apparent intention of the UK Government to prevent trusts settled by LTRs being used to shelter non-UK assets from IHT.

Trusts and income tax

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 – double taxation can arise.

Following changes to the UK tax rules in April 2025, the position may have improved.  Under the FIG regime, it should be possible for a UK resident settlor to avoid UK tax on income and gains generated on non-UK assets within a US trust. After the four-year period, the settlor will likely be subject to UK tax on the trust income and gains. However, with suitable planning, it should be possible to align the US and UK income tax treatment of many types of common trusts (such as US grantor trusts).

The timing of pre-immigration tax planning

Ideally, tax planning for individuals moving to the UK should be carried out before the beginning of the UK tax year in which they will first become UK resident. 

For example, a well-advised US taxpayer moving to the UK might collapse their trusts before arrival to avoid 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 – such as mutual funds and municipal bonds – can be taxed at higher rates in the UK.

Of course, not every US taxpayer is well-advised, and pre-immigration planning opportunities can be missed. Under the FIG regime, all will not be lost. Instead of having to complete all pre-immigration tax planning before arrival, US taxpayers may be able to use the initial four-year period, during which non-UK income and gains are not subject to UK tax, to restructure their assets and holdings more efficiently within the UK tax regime.

Reviewing US entities before entering the UK

Although certain 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 (often alongside the taxpayer, when they leave), the entities will face a mark-to-market exit tax on their assets.

This risk exists for anyone moving to the UK from abroad, but 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. US taxpayers moving to the UK with these types of common entities should obtain comprehensive advice before they move.

Rebasing assets

The FIG regime replaced a previous favourable UK tax regime, known as the remittance basis of taxation, in April 2025. Transitional provisions also introduced at that time allow previous remittance basis users who were not domiciled or deemed domiciled in the UK at any time prior to 6 April 2025 to rebase long-held personal assets to their 2017 values automatically. In doing so, the individual can 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 2017 values will not apply to them. Traditional pre-immigration planning for US taxpayers moving to the UK, including manually rebasing assets prior to residence, will remain important. Note that check-the-box elections are not recognised for UK tax purposes.

As noted above, it is common for US taxpayers to hold investments within an LLC or a grantor trust. Even if these are tax-transparent in the US, they are unlikely to be treated as such for UK tax purposes. Rebasing relief may, therefore, be unavailable as the underlying assets will not be treated as personally held.

Rebasing relief will also be unavailable if the individual did not previously claim the remittance basis. As US taxpayers are taxed in the US on their worldwide income, many may not have felt the need to claim the remittance basis in the UK.

Temporary repatriation facility (TRF)

Where US taxpayers living in the UK are previous remittance basis users, they will be able to benefit from a relieved rate of tax when remitting to the UK untaxed foreign income and gains which arose before April 2025.

The TRF is available for three UK tax years from 6 April 2025, with a 12% rate for the first two years, increasing to 15% in 2027/28. The TRF will also be available to US taxpayer settlors and beneficiaries of trusts, who are former remittance basis users.

The TRF is potentially a very valuable relief as it can be used in respect of certain pre-6 April 2025 foreign income and gains held within overseas structures (such as non-UK resident companies and trusts) to the extent that they are matched with benefits that receive by the individual during the three-year TRF period.

Deciding whether to leave the UK or stay

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. Ideally, such persons will have ensured that their financial strategies – including investment decisions and holding entities – are lined up in both the UK and the US.

For others, it will make more sense to become non-UK tax resident. The UK statutory residence test, though complex, makes it possible to predict what is needed to remain non-UK resident in any given tax year. The US/UK income tax treaty also enables a US taxpayer 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.

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

For US taxpayers, the UK remains an attractive option

The US / UK tax landscape is complex. As always, it is vital for individuals to take specialist advice at an early stage to mitigate any risks and maximise any benefits afforded by each jurisdiction’s tax rules and their interaction with one another. In many cases, however, there are planning opportunities which make the UK an attractive option for US persons moving overseas.