US citizens moving to the UK part 3: Navigating trusts, businesses and investment pitfalls
min readKey takeaways:
- US persons must be aware of new and continuing reporting requirements, including obligations arising under the Foreign Account Tax Compliance Act (FATCA).
- US revocable grantor trusts (living trusts) can inadvertently fall within the scope of UK tax and registration requirements when the settlor moves to the UK.
- Holdings in US LLCs can be particularly problematic, with the UK and US treating them differently for tax purposes, potentially resulting in double taxation without credit.
FATCA and reporting obligations for US persons in the UK
The tax position for a US person living in the UK can be complex and advice should be taken to mitigate double taxation. Ideally, advice should be taken prior to a US person moving to the UK, but some post-arrival planning may be possible during the first four tax years of UK residence if the individual can benefit from the FIG regime.
US persons moving to the UK should be aware of new and continuing reporting requirements. This includes the need to report taxes in the UK as well as the US, and reporting which may arise under the US Foreign Account Tax Compliance Act (FATCA), which requires UK financial institutions to report information on US account holders.
UK home ownership: Tax considerations for US persons
It is usually most UK tax efficient to own a UK home personally, rather than through a corporate or trust structure. The main options to mitigate IHT focus on funding the acquisition with a commercial mortgage, life insurance and tax-efficient estate planning. Care should be taken with sterling mortgages, as repayments can result in a foreign currency gain or loss for US tax purposes. Commercial borrowing can also be expensive, whilst private borrowing may not assist with IHT mitigation.
Relief from tax on a gain realised on the disposal of a home is less generous under US rules as compared to the UK, so it can help to purchase a UK home in the name of a non-US spouse where the couple comprises a US spouse and a non-US spouse. If a US spouse contributes to the purchase price of a UK home, annual gifts of interests in the property can be structured to mitigate US transfer tax whilst improving overall UK tax efficiency over time.
Trusts: Avoiding the UK tax and registration traps
US persons with connections to trusts should obtain advice due to several traps which can arise once they become UK resident. For example, a US person who is the sole trustee of a US revocable grantor trust (also known as a living trust and often used for US estate planning purposes to circumvent US probate) may bring the trust within the scope of UK tax and registration requirements on moving to the UK.
Consideration should be given to winding down US trusts before arriving in the UK, to avoid complex UK anti-avoidance rules which may result in UK tax on an individual moving to the UK on pre-UK income and gains, without credit being given for historic US taxes paid on the same income. For trusts that cannot be wound up, planning can be carried out to align tax arising under the US grantor rules and UK anti-avoidance rules for settlors to obtain relief from double taxation under the US/UK double tax treaty.
Businesses, investments and LLCs: Restructuring before you move
US business owners should take care not to bring their non-UK companies within the scope of UK corporation tax inadvertently by exercising control over, or acting as a shadow director of them, whilst in the UK. With care, avoiding such “central management and control” from the UK is achievable. A US person should review their sources of wealth, whether from trust distributions, gifts, company dividends or investment 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 advantageous from a US tax perspective may suffer adverse UK tax treatment. For example, mutual funds where gains realised on such funds are typically taxed as income in the UK. Holdings in LLCs can be particularly problematic, with the UK often treating LLCs as opaque and the US treating them as transparent for tax purposes. This means a US shareholder resident in the UK may be taxed on the LLC’s profits in the US but on distributions from the LLC in the UK, and the UK may not give credit for the tax paid in the US due to this mismatch.
The interaction of the UK and US tax regimes sets a number of traps for the unwary and, without careful planning, it can result in double taxation. Estate planning for clients with US and UK connections also presents particular challenges because of the long reach of US estate tax and IHT. The US/UK tax landscape is, however, navigable with appropriate advice and planning strategies from advisers well-versed in maximising the opportunities and overcoming the pitfalls in this area.
This is Part three of our eight-part series, “US citizens moving to the UK.” Read the other posts in this series for guidance on immigration, tax residence, inheritance planning, healthcare, banking, housing and education.
