The interaction of the UK and US tax rules for individuals and trusts (complex in their own right) can result in significant, unexpected tax charges and ongoing complexities in the absence of proper planning.
US persons moving to the UK will continue to be subject to US tax and reporting obligations but will also become subject to UK tax, and the double tax treaty between the US and the UK this will not always prevent double taxation meaning that advance planning is essential.
Particular issues also arise in relation to estate planning for US citizens with a non-US citizen spouse as the US unlimited marital deduction will not be available. On the other hand where members of a non-US person’s family move to the US and become US citizens or green card holders, steps will need to be taken to avoid adverse tax consequences for any family trusts.
These are just some of the issues that you could face if your family have both US and UK connections. Our transatlantic team are not only experts in the domestic tax, trust and estate planning issues in the US and the UK but also the way in which the rules interact – our advice covers:
We helped a US citizen make a tax efficient move to the UK. As a US citizen she will continue to be subject to US tax and reporting obligations even after leaving the US but will also become subject to UK tax. We advised her to claim the remittance basis of taxation to ensure she did not suffer tax twice on the same income – the mis-match in the UK and US tax treatment of certain entities means that the US/UK double tax treaty does not provide her with relief from double taxation. We also ensured that her US revocable trust (set up to hold her US assets to avoid the need for probate in relation to those assets) would not become UK resident on her moving to the UK; if we had not taken action all the income and gains of the trust would have been subject to UK tax.
Our client, the non-US settlor of a non-US grantor trust, was concerned about the potential US tax exposure and reporting obligations of the trust and his US children and grandchildren, who are beneficiaries, following his death. Changes to the US controlled foreign company (CFC) rules mean there is a risk of the US beneficiaries being subject to tax on the inbuilt gains of the underlying company which had been established to protect the US assets in the trust from US estate duty, as well as information reporting. We restructured the trust to ensure it could continue to invest in US assets while mitigating the US beneficiaries’ exposure to US tax.
We helped our clients, a couple where one is a US citizen and the other is not, avoid significant tax issues on the first death. Gifts made from the US citizen to his non-US citizen spouse, during life or on death, do not benefit from the US marital deduction and, without proper planning, will be subject to US estate tax. As no UK inheritance will be due until his wife’s death the US/UK estate tax double tax treaty does not help. We provided for the US citizen’s assets to pass into a US qualified domestic trust (a ‘QDOT’) on his death rather than to his wife absolutely – structured properly the assets passing into the QDOT will qualify for the US marital deduction on his death. We ensured the QDOT was set up so that the assets passing into the QDOT qualify for the spouse exemption from UK inheritance tax. This planning can align the US and UK tax charges.