In this series of articles, we will discuss the timeline of a U.S. expat living in the U.K. — from pre-arrival all the way to lifetime resident. Each article will outline the challenges and planning opportunities to consider during each step of the journey. U.S. citizens are in the unenviable position of being taxed on their worldwide income and gains. This simple fact causes many challenges for Americans when making seemingly simple financial decisions. Understanding the key pain points and questions to ask along the way can make all the difference.
Here is the link to Part 1 where we discuss some of the preparation Americans can do before moving to the U.K. to avoid some of the common areas that can cause complexity later on.
In this, Part 2 of the series, we discuss the key pitfalls and planning considerations for your first 7 years in the U.K.
The generosity of HMRC
The U.S. is sometimes called The Land of Opportunity or The Land of Milk and Honey.
“Come here and you can be anything you want to be and do anything you want to do. Opportunities are endless and you too can achieve the American dream.” All the IRS asks for in return is to tax you on your worldwide income and gains wherever you live in the world from the moment you become a citizen (or green card holder).
The U.K. is a bit more generous.
HMRC will generally only tax you if you are resident (naturally there are a few exceptions). As a non-domiciled individual, you are given the choice to be taxed on (a) the arising basis, which is similar to the U.S. in that you are taxed on all worldwide income and gains (converted to GBP), or (b) the remittance basis, where broadly you are only taxed on U.K. source income and gains (as long as you do not bring or use certain offshore money or assets into the U.K.)
Click here to read one of our other posts with a longer explanation on the key differences between the two tax systems.
The remittance basis is ‘free’ for the first seven tax years. After that, if you want to file on the remittance basis they require you to pay £30,000/year for years 8-12, and then £60,000/year for years 13-15.
Starting in year 16, you will be considered ‘deemed domiciled’ and there is no longer a choice. The worldwide basis will apply and you will also fall into the U.K. inheritance tax net.
The remittance basis gives individuals with complicated financial affairs outside the UK time to sort them out if they plan to live in the U.K. long term.
Common pitfalls
So, what would constitute having complicated affairs? While the below list is by no means exhaustive, it does cover some common areas for further investigation:
- If you have investments that are invested in mutual funds or ETFs
- If you have significant non-U.K. income or gains
- If you are a trustee or beneficiary on any trusts
- If you are a member of an LLC
- If you own property in the U.S.
If you are affected by any of the above, then it is worth speaking to an investment and tax specialist to understand how you might be able to mitigate adverse tax consequences.
The appropriate advice will depend on a number of factors, but in my experience there are two key considerations:
1) How long have you been resident in the U.K. and how long do you plan to stay?
If you're like most people, you probably think you have a good idea. If you're also like most U.S. expats I know, it's likely much longer than you think! The important thing to remember is that if there is even a possibility that you will stay longer than 7 years, you should take stock of your situation sooner rather than later and review each year.
2) Will you need to bring any of your assets from the U.S. (or offshore) into the U.K.?
Do you need to supplement your income to cover living expenses, meet a future down payment on a house, or pay school fees for your children? If so, then you will want to have a discussion with your accountant about the magnitude and source of capital to bring into the U.K.
Many U.S. expats assume that they have full access to their worldwide assets when they come to the U.K. This may be true if you have filed on the arising basis the entire time you've been resident in the U.K. or if you have segregated some ‘clean capital’.
However, if you have been filing on the remittance basis (which is very standard U.S./U.K. tax advice), then you may be subject to some additional tax in the U.K. on income and/or gains that have already been taxed in the U.S.!
If you know that you will be in the U.K. less than 7 years and you will not need to bring any of your offshore income or assets into the U.K., then you may well be able to enjoy a true seven-year U.K. tax honeymoon.
But if, like many of us, you have no clue how long you'll be here and think you might need to have access to your offshore assets and income, then read on!
Ok, so what can be done?
The first step is to take stock all of your worldwide assets. What is your relationship to them, how are they held or structured, and what do you actually own?
If you have assets that you may need in the U.K. at a future date, try to create a segregated pot of ‘clean capital’. If you haven't done this prior to moving, you may have to pay some additional tax in the U.K. (with possible credit in the U.S.) to make it clean, but it will be worth it in the long run to have the flexibility. Qualified U.S./U.K. accountants can help you isolate a pot of clean capital.
For your existing investment portfolios in the U.S. or offshore, the key sticking point is funds (either listed ETFs or mutual funds). If they do not have U.K. reporting fund status – and almost all U.S. mutual funds do not – then you may be subject to income tax rates (at up to 45%) on all income and realised gains.
If you plan to stay in the U.K. long term, look to transition away from these funds during your first 7 years (if you're filing on the remittance basis). Otherwise you may get stuck with some very inefficiently taxed investments that you will have to deal with at some point.
If you are a trustee or beneficiary of a trust (currently or will become in the future), or if you own assets in or are a member of an LLC, you should speak to a qualified U.S./U.K. tax lawyer to see if some adjustments need to be made. What may be perfectly sensible U.S. planning could end up being very inefficient from a U.K. perspective – and in many cases can result in significantly higher or even double taxation.
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 or tax advice. You should not act or rely on this document but should contact your professional advisor. This document has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. 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 including changes in tax law or practice. Brown Advisory does not provide tax advice.