News | March 28, 2023

Traps and pitfalls when advising US/UK clients

This article is designed to highlight some of the potential tax issues and risks for UK resident individuals with US connections.

What do we mean by “US connections”?

The following are examples of circumstances in which you will have “US connections”:

  • you are a US citizen or green card holder;
  • you are tax resident in the US;
  • you are married to a US citizen; or
  • any beneficiaries of your estate or any trusts that you have created (such as any children of yours) are US citizens or reside in the US.

UK and US tax advice should be sought when considering any estate planning, as well as when purchasing or selling UK property to avoid the potential for double taxation. By “estate planning” we mean making a Will, setting up a trust or granting a Lasting Power of Attorney. 

What are the key points to watch out for?

Domicile/Citizenship

In the UK, we refer to an individual’s “domicile”; in the US, this concept is interpreted as being akin to citizenship. Under English law, your domicile affects your liability to UK inheritance tax and also determines the succession of moveable assets on death. Because an individual’s domicile for English law purposes is in a particular state in a federal system, and in the US succession laws differ from state to state, appropriate advice will be required in the relevant state.

Why is US citizenship relevant? Because regardless of how US citizenship is obtained or where one is tax resident, American citizens are still required to file US tax returns in respect of their worldwide income and gains, and are subject to various reporting requirements. Where a person’s domicile and residence or citizenship(s) are not in the same jurisdiction, careful planning needs to be put in place to avoid unintended results and the risk of double taxation; for example, if an individual who has an English domicile of origin acquires a “US” domicile of choice after moving to New York but then moves to a different state in the US, their English domicile may revive.

UK Property – Capital Gains Tax (“CGT”) and Ownership Structures

UK tax residents selling their main home should benefit from Principal Private Residence Relief (“PPR“) for CGT purposes. If the criteria are satisfied, no CGT will be due when their principal residence is sold or otherwise disposed of. The position is not the same in the US, however: any gain realised by the US citizen when their UK property is sold in excess of $500,000 will be subject to US federal income tax. Consequently, whilst no CGT is due in the UK, a substantive US tax bill may be lurking in the shadows.  Careful planning is required to maximise the reliefs available and avoid adverse taxation. 

How a mixed US and non-US couple owns or co-owns their marital home can have unintentional adverse tax consequences in the US and/or UK. The couple’s respective equity divisions (and those of other assets in their estates) will need to be considered. Jointly owning a home where only the US spouse has provided the funding, or attempting to redress the split of assets through the US spouse gifting their share in the property to the UK spouse, could trigger US gift tax.

Individuals with UK/US connections can find themselves subject to a great deal of complexity with respect to their tax affairs and estate planning considerations. It is important to obtain professional advice with respect to both jurisdictions, to achieve efficient estate planning and avoid unnecessary adverse taxation. If any of the circumstances in this article are relevant to you, or your client, please contact the authors or another member of the Offshore Private Client team for advice.