Ask Ollie: I was born in the United States when my father was working there…

16 / 07 / 2018

Senior Associate Oliver Embley answers all your questions

I was born in the United States when my father was working there. I gather that this might have tax problems. Could you please explain why?

You are an ‘Accidental American’ because, under the “United States (“US”) Constitution’s 14th Amendment, people born in the US are US citizens, regardless of their parents’ citizenship status. The US is one of only a handful of countries which taxes its citizens on their worldwide income and assets regardless of where they live.

If you are resident in the UK, you must pay UK income tax. However, as a US citizen you must also file US tax returns. Thankfully there is a Double Taxation Agreement (“DTA’’) which means you will not need to pay tax in both countries.

Instead you will pay tax in the country which has the highest rate of tax (normally the UK) and that country will give the other a tax credit.

There is a nasty trap where US citizens own property in the U.K. Your home will be free of capital gains tax (“CGT’’) here because of the “principal private residence exemption”. However, the US does not have an equivalent CGT relief for property outside the US. Therefore, a US citizen who owns UK real estate will be liable to pay CGT in the US when they come to dispose of UK property. This happened to Boris Johnson when he sold his Islington home in 2009.

US citizens may also fall into the scope of both UK inheritance tax (“IHT’’) and Federal Estates Tax (“FET’’) when they die. However, your estate will only pay FET if your assets and gifts made in your lifetime exceed $11.18m (the current FET filing threshold). Again, the DTA will prevent your estate paying both IHT and FET but filings must still be made in both countries. A US/UK accountant will be able to assist; please let us know if you would like any recommendations.

It is possible to renounce your US citizenship but if your net assets are more than $2 million then there will be an ‘exit tax’ in the US equivalent to a CGT charge on your worldwide assets.

If you are a US citizen living in the UK, coordinated tax advice in respect of both jurisdictions is key. If we can assist in any way, please contact us.