The U.S. and U.K. tax systems are fairly easy to understand on their own. It’s when you combine them that things go from straightforward to more complex.
In this short post, we will give you a brief overview of the basic principles of the two systems and how they interact when you’re in the somewhat unfortunate circumstance of needing to follow both.
The U.S. System (tax year: January 1st to December 31st)
All citizens, residents, and Green Card holders are taxed on their worldwide income and gains regardless of whether they are resident in the U.S. This is called a citizenship based system of taxation.
The U.K. System (tax year: April 6th to April 5th)
In contrast to the U.S., most countries, including the U.K., apply what is known as a residency based system of taxation. This means you will only be taxed on your worldwide income and gains while you are tax resident in the country.
There is a twist for individuals who are considered ‘non-U.K. domiciled’. This topic is complex and for the purposes of this article, we will make the assumption that most Americans moving to the U.K. are not considered U.K. domiciled when they arrive. If you are unsure of your domicile status, you should speak to a qualified U.K. accountant. As a non-domiciled individual, you are given the choice each tax year to be taxed in one of two ways: 1. the arising basis or 2. the remittance basis.
1. The arising basis (worldwide)
The first, and simplest way, is that you can be taxed on all worldwide income and gains. This is called the ‘arising basis’ and is the same way the U.S. taxes its citizens. The good news with the arising basis is that as an American, you get a credit in the U.S. for taxes paid in the U.K. This means that in most instances you will simply pay the higher rate of tax between the U.S. and the U.K.
If you are filing on the arising basis, it could be a good idea to make your U.K. tax payments (if you owe anything) before the end of the calendar year. Otherwise, you may have to wait another tax year to claim the tax credit in the U.S. and end up paying tax in both countries until the credit can be applied.
2. The remittance basis
You also have the option of being taxed on ‘the remittance basis’. This means that the U.K. will only tax you on U.K. source income and gains or on certain assets that you bring into the U.K. where U.K. tax has not been paid. The remittance basis is free for the first seven tax years you spend in the U.K. Between years 8-15, HMRC charges you an annual fee for the right to ignore your non-U.K. assets. This is called the remittance basis charge (RBC) and starts at £30,000/year for years 8-12, and moves up to £60,000/year for years 13-15.
The remittance basis is something of a double edged sword.
It can be very useful if you have a complicated existing situation (i.e. trusts, LLCs, existing portfolios with lots of funds) and you plan to stay in the U.K. for a short period of time.
The downside is that it reduces flexibility and possibly restricts access to your non-U.K. wealth.
So what should you choose?
A good accountant will help you make the right decision based on your specific circumstances. At Brown Advisory, we work closely alongside many excellent accountancy firms and we are more than happy to make recommendations.
It's common for U.K. accountants working with non-domiciled Americans to default to filing their clients on the 'remittance basis'. This means they don’t need to worry about gathering information on any assets that may be held outside the U.K. and may mitigate double taxation (or inefficient taxation) concerns if there are existing complex structures in place such as LLCs.
While in many cases this will be the right decision, there are situations where it could make more sense to choose the ‘arising basis’ (worldwide) in the first instance.
For example:
- If you have no assets outside the U.K.
- If there is a possibility that you will stay in the U.K. on a longer term basis (greater than seven years) and you would like the flexibility to always have access to your worldwide assets in the U.K. without further complications.
We all know that life is unpredictable and despite best laid future plans, things often change. We work with many clients in this situation, and it seems very common for Americans to plan to come to the U.K. for a few years, only to wake up 15 years later with a family, a house, and a very expensive and complicated tax situation to untangle.
If you maintain flexibility in your financial affairs and seek appropriate advice along the way you can avoid a lot of mental (and financial) pain down the road.
Whether you plan to spend a few years, a few decades, or the rest of your life outside the U.S., Brown Advisory can deliver a comprehensive cross-border investment plan for you and your family that can move with you wherever life may take you. Learn more >
Billy Mathews, a U.S. expat himself, is a Portfolio Manager in our London office and helps U.S.-connected clients build U.S./U.K. tax efficient investment portfolios to meet their long-term goals and objectives.
This material is not intended to be, and shall not be construed as being, investment advice. Investment decisions should not be made on the basis of it. Past performance is not indicative of future performance and there is a risk that some or all of the capital invested may be lost. The information contained herein is based on materials and sources that we believe to be reliable. We make no representation, either express or implied, in relation to the accuracy, completeness or reliability of that information. The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. Brown Advisory does not provide tax advice.