US & UK
Citrine International is an independent firm of international tax practitioners who provide a bespoke tax consultancy service to help individuals and corporate entities with their tax exposures in the UK and US.
We work closely with our clients, and their advisers, to ensure a pragmatic, conservative and solutions-based approach to tax planning. Beyond compliance, with the multitude of relevant tax rules, our tax consultancy service ensures we apply carefully constructed planning methodologies to keep global tax liabilities to a minimum for our clients.
Planning: Pre-US immigration planning for UK tax residents
We assist individuals who are moving from the United Kingdom to the United States to optimise their global tax positions. With cross-border moves there are both pitfalls and opportunities to be carefully considered. To take full advantage of tax planning it is very important that advice is taken as early as possible before the move. Such advice may include the following:
- Tax residency
- determining an optimal US tax residency start date;
- managing the start of state tax residency which may differ from that for US purposes;
- co-ordinating the commencement of US and state tax residency with UK residence termination;
- advising on how to avoid re-triggering French tax residency whilst in the United States;
- considering the overall question of tax residency in the context of the UK / US double taxation convention.
- Timing of income
- managing the timing of significant transactions and determining whether it is possible to accelerate income recognition prior to becoming US tax resident without adverse UK tax consequences.
- Choice of US state
- where possible and practical, choosing which state in which the individual intends to reside. Income tax rates can vary significantly between states. Some states have community property laws such that married persons are considered to own their property and income jointly, regardless of title.
- Entity classification elections
- considering elections to trigger gain for US tax purposes prior to becoming US tax resident without realising gains in the United Kingdom.
- US anti-deferral regimes
- reviewing non-US investments to ensure that ‘toxic’ investments are restructured (e.g. those which could result in adverse US taxation and onerous reporting under the PFIC and CFC anti-deferral regimes).
- Non-US pensions
- analysing non-US pension holdings to establish whether treaty protections will apply to contributions and the plan’s earnings / accretions;
- considering the impact of US pension basis rules for a non-resident alien becoming US tax resident.
- analysing trusts created for the client’s benefit for their US income tax treatment and whether they are transparent for US income tax purposes.
- reviewing foreign trusts to determine whether an immigrating client would be subject to US income tax on the foreign trust’s income as a result of the ‘five year’ rule.
- US estate / gift taxes
- considering whether an accelerated gifting strategy is appropriate, prior to moving to the United States in order to avoid gift tax limits, reduce the client’s exposure to US estate tax and remove ‘toxic’ assets from the client’s portfolio;
- analysis of facts and circumstances to determine domicile status for US gift and estate tax purposes. Guiding the client, where desirable, to maintain his US connections at a minimum to avoid US domicile status.
- US filing obligations
- guiding the client as to his reporting obligations after becoming resident. These may extend beyond the need to file an annual tax return. Additional forms such as an ‘FBAR’ to report non-US financial accounts, form 8938 to report foreign financial assets, form 5471 to report interests in certain foreign corporations, etc. may be required. The failure to file these reporting forms can carry significant statutory penalties.
We have a deep understanding of domestic US and UK tax law and their interaction with the UK / US double taxation convention. We can help our clients to plan to avoid unintended, negative outcomes and to optimise their global tax positions. We work collaboratively to establish a coherent tax strategy that is designed to optimize taxes, manage costs and streamline administration.
Planning: Expatriation for US citizens / green card holders resident in the UK
There can be significant US tax consequences when a US citizen or lawful permanent resident (a so-called ‘green card holder’) relinquishes their citizenship or green card. The United States imposes an exit tax on individuals who are ‘covered expatriates’. We assist our clients in understanding whether the exit tax is likely to apply and advise them how to avoid covered expatriate status where possible.
Broadly, a covered expatriate is someone:
- whose net worth exceeds 2 million USD; or
- whose average tax liability for the previous 5 years exceeds 177,000 USD (for 2020)
- who has failed to certify that they are tax compliant for the previous 5 tax years.
The worldwide assets of a covered expatriate are treated as if disposed of on the day prior to expatriation. Any resulting gain in excess of an exclusion amount of 737,000 USD (for 2020) where applicable, is subject to the exit tax.
There are complex rules concerning the taxation of deferred compensation (such as the client’s UK pension plan) of covered expatriates.
With sufficient time and appropriate tax planning it may be possible to avoid covered expatriate status and therefore the exit tax.
Individuals expatriate for a variety of reasons and the easing of US tax burdens is a clear benefit. We can help both covered expatriates and non-covered expatriates to avoid unintended US tax consequences in the years following expatriation.
Planning: Pre-UK immigration planning
It is important for an individual who wishes to move to the United Kingdom to take UK tax advice prior to relocating. This would involve establishing when UK tax residency is likely to commence and whether it is possible to benefit from the UK’s favourable tax regime for non-UK domiciliaries. These so-called ‘non-doms’ may benefit by using the remittance basis to avoid UK tax on income and gains arising and kept offshore.
We can assist with a comprehensive pre-immigration strategy to ensure tax optimisation. This would include analysing our client’s residency and domicile status as well as specific items such as:
- structuring offshore accounts for effective remittance basis planning
- to separate income from (clean) capital;
- ideally prior to the individual becoming UK tax resident.
- strategising for movements of funds to the United Kingdom during periods of non-residency;
- analysing the client’s investment portfolio to
- identify whether ‘toxic’ non-UK investments need to be restructured. These include ‘offshore funds’ that do not have HMRC reporting status;
- avoid UK sources of income and gains;
- realise foreign income while non-resident;
- realise foreign gains and non-UK land / property gains when non-resident and postpone losses until UK resident.
- analysing non-UK trusts for their UK tax treatment
- particularly to prevent accidental importing of a foreign trust into the United Kingdom;
- special issues can arise where there is a mismatch in the UK and US tax treatment of a trust’ for example where the United Kingdom considers a trust to be a taxable entity in its own right but the United States considers it to be a grantor trust (in which case the owner of the trust would be taxable on the trust’s income).
- reviewing the client’s involvement in offshore corporate structures and partnerships
- to determine whether there is any exposure to double taxation due to a mismatch between the source country and UK tax treatment of the entity in question;
- US LLC’s and S-corporation interests can pose particular problems when held by UK residents if no planning is carried out. HMRC’s default treatment of these types of entity may not match the default (or elected) treatment of the entities by the IRS.
- considering the tax efficiency of employment arrangements including:
- whether it is preferable for the client to be on a secondment from the home country versus being a UK local hire;
- whether the ‘detached duty’ rules should also be considered where the immigrating individual is sent by their employer on secondment from their home country to the United Kingdom for up to two years. There can be significant UK tax benefits for such individuals who can claim a UK tax deduction for travel and subsistence costs relating to the UK secondment;
- whether ‘overseas workdays relief’ can apply to exempt employment income connected with non-UK workdays from UK income taxation.
- analysing non-UK pension holdings to determine whether there are any potential negative UK tax impacts. Alignment of tax treatments between the pension plan’s country of residence and the United Kingdom may be achievable through a double taxation convention. The UK / US convention covers many (but not all) situations involving the tax treatment of US pensions held by UK tax residents.
Planning: UK remittance strategies
The UK has a potentially generous tax regime with regards to the offshore income and gains of individuals who are non-domiciled in the United Kingdom. The regime allows such individuals to avoid UK tax on income and gains held offshore so long as the income and gains are not remitted to the UK.
The regime does not apply to individuals who are UK non-domiciled but were born in the United Kingdom with a UK domicile of origin. Nor does it apply to individuals who have been resident in the United Kingdom during 15 out of the previous 20 UK tax years. Such individuals are referred to as UK ‘deemed domiciled’.
It is possible to carry out highly effective remittance planning where an individual has not been UK tax resident for more than seven out of the previous nine UK tax years. This is because there is limited cost to claiming the remittance basis. After the seventh year of UK tax residency there is an annual cost to claiming the remittance basis known as the ‘remittance basis charge’. This is 30,000 GBP (rising to 60,000 GBP where an individual has been resident in the UK for more than 12 out of the previous 14 tax years).
We can help with putting together a remittance strategy and advising on appropriate offshore financial account structures. Such a strategy will focus on the timing of remittances, structuring offshore accounts to segregate income from clean capital and whether an election should be made in respect of foreign losses.
Since remittance planning relies fundamentally on the taxpayer having a non-UK domicile, it may be necessary to perform a detailed domicile review especially where it is anticipated that the move to the United Kingdom will be long-term.
Planning: Managing US delinquent filings
Where an individual is struggling because they are delinquent with their historical US tax filings, we can provide advice on the best way to bring their tax affairs up to date. This may involve filing outstanding tax forms under one of the IRS’s ‘streamlined offshore procedures’. There are two such procedures, a foreign one and a domestic one, which have been available since September 2012. These are available to taxpayers who certify that their failure to report foreign financial assets and pay all tax due in respect of those assets was not a result of willful conduct.
Both procedures require that six outstanding foreign bank account reports (FBARs) and three outstanding US tax returns be filed along with a certification of non-wilful behaviour. We are able to assist in the completion of these forms.
The foreign offshore procedures offer a more desirable outcome because zero penalties are assessed. A minimum penalty of 5% of the highest value of unreported foreign financial assets is due under the domestic offshore procedures. Either way, the availability of a highly reduced or zero penalty regime is to be welcomed.
Individuals who are behind in their US tax filing obligations should strongly consider using the streamlined offshore procedures to bring their affairs into order. It does not pay to prevaricate for two reasons: firstly, should the IRS enquire into the taxpayer’s affairs first, the procedures will not be available; secondly, the IRS has indicated that these procedures may not be available indefinitely.
If a taxpayer is concerned that their non-compliance may be construed as willful, it will be essential to consult with a tax lawyer. We work with lawyers who are eminent in the field of US taxation and who can advise how to manage the path towards becoming compliant.
Planning: Managing UK tax on unreported overseas income
HMRC declared in 2018 that it would be toughening its approach to individuals who have undeclared offshore income. This has resulted in HMRC having access to data from over 100 countries that have agreed to share information. Also, we have seen the implementation of the ‘Requirement to Correct’ legislation which obliges taxpayers to disclose their unreported offshore income using the Worldwide Disclosure Facility. This is achieved online through the Digital Disclosure Service.
The WDF is available to taxpayers who need to disclose a UK tax liability in connection with an offshore issue, which includes:
- income arising from a source outside the United Kingdom
- assets situated or held outside the United Kingdom
- activities carried on wholly or mainly outside the United Kingdom
- where funds connected to unpaid tax are transferred outside the United Kingdom
The WDF allows taxpayers to regularise their tax affairs with HMRC, however it does not offer any favourable terms or reduced penalties. The penalties under the Requirement to Correct rules can be high, with penalties for a prompted disclosure (with no reasonable excuse) generally between 150% and 200% of the tax outstanding.
We understand that, no matter how careful a client has tried to be when operating on their own, mistakes can easily have occurred. We work with our clients to calculate their financial exposure and to communicate with HMRC with a view to mitigating potential penalties. The WDF is one option but will not be appropriate in every case.
Planning: Work secondments to the UK
When companies send their employees to foreign territories there are tax implications both in the home and the host locations. We can advise both the employer and the employee on how best to structure overseas assignments for maximum tax (and social security) efficiency. This may involve helping the company to establish a corporate assignment policy and even a tax equalisation programme with a view to neutralising the tax effects of the assignment to the employee.
We offer a comprehensive service covering compliance and consulting as follows:
- assignment structuring advice (tax equalised, tax protected, ad hoc, local)
- arrival and departure meetings with internationally mobile employees
- handling tax authority arrival and departure formalities
- completion of individual tax returns
- assistance with obtaining social security certificates of coverage
- help with establishing shadow/modified payrolls
- preparation of tax equalisation and cash-flow computations
In building a cross-border tax strategy for secondees, it will be important to understand specific tax breaks that may be available. Much of this is be covered in the section on pre-immigration planning. Specific to employees, there is relief from UK tax on income relating to days spent working overseas where the income is paid offshore and remains offshore. This relief can be available for up to three years.
The ‘detached duty’ rules should also be considered because significant tax breaks may be available where the immigrating individual is seconded by their employer to the United Kingdom for up to two years. The UK tax benefits are in the form of a UK tax deduction for travel and subsistence costs relating to the UK secondment. This includes amounts paid by both employer and employee.
Whether or not the employee is seconded has a direct impact on the outcome from a social security contribution perspective. Where there is an appropriate ‘totalisation agreement’ between the United Kingdom and the home country it may be possible to continue to pay into the home country social security system while resident in the United Kingdom for a number of years. Such a totalisation agreement exists between the United States and the United Kingdom and, generally, US secondees to the United Kingdom can pay into US social security for up to five years.
Careful structuring of the intended employment is advised so as to maximise the potential benefits. For US citizens and green card holders who are paying US tax on their worldwide income the various UK tax breaks may not have their full impact. However, a careful analysis of the global situation should be carried out to see if the residual US tax can be relieved using other US tax reliefs (e.g. through the use of foreign tax credits, the foreign earned income exclusion, etc.)
Planning: Short-term business visitors to the UK
Individuals who are employed outside the United Kingdom, who are not UK tax resident but spend time working in the United Kingdom are known as short-term business visitors (STBVs). Such STBVs are strictly subject to the same UK tax withholding (PAYE) regulations that apply to UK resident employees.
However, in certain circumstances the UK company may be able to request a relaxation to the normal PAYE rules for STBVs. These circumstances generally apply where the employee in question is expected to be able to claim relief from UK taxation on their employment income under the dependent personal services article of a double taxation convention.
We offer advice to employers in applying for and complying with the following arrangements:
- ‘EP Appendix 4’ arrangement in respect of STBVs that can claim treaty benefits
- ‘EP Appendix 8’ arrangement for STBVs from non-treaty countries
We assist employers in complying with these arrangements by effectively analysing the tax residency status of heir STBVs and the applicability of double taxation conventions. France and the United States have comprehensive double taxation conventions with the United Kingdom, including a dependent personal services article. US and French employees may therefore qualify under the STBV rules.
Planning: Gifts and death
We can help clients with assets in the United States and the United Kingdom to establish a favourable tax strategy with regards to US estate / gift taxes and UK inheritance taxes.
Where a marriage or civil partnership includes a US citizen and a non-US citizen there can be significant tax issues without appropriate planning. This is also the case where one of the individuals is domiciled (or deemed domiciled) in the United Kingdom and the other is not.
The US uniform transfer tax regime, provides for a 40% rate of tax on taxable estates and taxable lifetime gifts. The tax only applies where the lifetime gifts and estate of a US citizen or domiciliary exceed a lifetime exclusion amount (which is 11.58 million USD for 2020). Gifts between spouses usually benefit from an unlimited marital deduction. This is not the case where gifts are made by a US citizen spouse to a non-US citizen spouse.
An individual who is non-UK domiciled and who has not become deemed domiciled in the United Kingdom is subject to UK inheritance tax on their UK assets only. An individual who is domiciled (or deemed domiciled) in the United Kingdom is subject to inheritance tax on their worldwide assets.
UK inheritance tax is generally levied at a rate of 40%. Most lifetime gifts are not subject to UK inheritance tax where the donor survives seven years from the date of the gifts. Estates are taxable to the extent they (and any taxable lifetime gifts) exceed the nil rate band of 325,000 GBP, currently. There is an additional inheritance tax relief where a main home is concerned. For 2020/2021 the main residence nil-rate band allows for an additional 175,000 GBP to avoid inheritance tax where a main home is passed to a direct descendant.
We can assist clients in developing a coherent global transfer tax strategy which may include:
- Making lifetime gifts to reduce the client’s taxable estate.
- Review of existing wills, trusts and other documents (e.g. lasting powers of attorney) from a tax perspective and engaging with an international lawyer where revised or new documents are required. This is important where, for example, an individual appoints a US citizen to be the executor and trustee of their estate. Without an appropriate general limitation on the powers of the US citizen the entire value of the will trust could fall within the US trustee’s estate for US estate tax purposes.
- Considering the use of a qualified domestic trust (QDOT) to prevent US estate tax being due until the surviving non-US citizen spouse takes out the trust assets or dies.
- Analysing whether an excluded property trust would be appropriate for a UK non-domiciled (and non-deemed domiciled) individual to avoid UK inheritance tax on offshore assets.
- Considering whether a life insurance policy would help to mitigate against future taxes due on death. To be tax effective this may require the use of an irrevocable trust to hold the life insurance policy.
Divorce is a hard process to endure and the tax complexities are exacerbated when assets are located and spouses are resident in different jurisdictions. We work with our clients’ lawyers to ensure that divorce negotiations take account of the UK and US cross-border tax implications.
It is imperative not to treat tax as a secondary issue in divorce negotiations. A failure to fully grasp the various tax consequences can result in significant tax bills arising from seemingly insignificant actions.
The timing of the transfer of assets in the United Kingdom between spouses that are divorcing is essential to avoid potential adverse tax consequences. Waiting to transfer assets after the tax year of separation can result in UK capital gains tax, which might otherwise have been avoided. We advise clients on the most efficient way to transfer assets due to separation.
Major complexity can arise where a non-US spouse has set up tax efficient structures (e.g. offshore companies and trusts) during the marriage to the exclusion of the US spouse. The extracting of value from these structures to fund a divorce settlement can present significant tax problems. We can assist in unravelling the complexity and deriving a step plan for tax-optimal value realisation.
Recent changes have seen the elimination of a US tax deduction for alimony or separate maintenance payments. No deduction is allowed in respect of divorce / separate maintenance agreements executed after 2018.
Clients are strongly advised to take tax advice as soon as possible where a separation has occurred or is seen as inevitable.
Domestic tax rules concerning pensions can be highly complex. The cross-border taxation of retirement schemes raises the level of complexity significantly. The key to understanding how pensions will be treated often lies in the conditions found in double taxation conventions. This is particularly the case with the UK / US convention which contains provisions covering pension distributions, contributions and growth in UK and US pensions held by residents of either or both jurisdictions.
The initial problem lies in understanding whether a pension in one territory is even regarded as a pension by the other territory under the terms of a double taxation convention. While the UK / US convention covers many situations, the terms for obtaining equivalence of tax treatment in both territories often do not apply. This may or may not be a problem depending on the client’s specific circumstances (e.g. where the client has sufficient ‘excess foreign tax credits’ on a US tax return the lack of treaty protection for pension contributions may be purely academic).
We analyse our clients’ existing and envisaged pension provision to determine whether they would be tax efficient based on their future expected tax residency. This can be particularly tricky where an individual decides to move to a different country in future.
US regulations currently require additional reporting with respect to certain foreign pension schemes. These can include the annual filing of forms FinCEN 114 (Report of Foreign Bank and Financial Accounts), 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts), 3520-A (Annual Information Return of Foreign Trust With a US Owner) and 8938 (Statement of Specified Foreign Financial Assets). The failure to file these forms can result in significant penalties. We can help with the preparation of these forms.
We work with our clients, their pension providers and financial planners to ensure that pension provision is considered in a tax efficient manner with short, medium and long-term strategies in mind.
Planning: Owning and investing in businesses
There are complicated rules that impact US persons who have interests in non-US corporations. Firstly, it should not be presumed that an entity that is established as a company in a jurisdiction is considered to be a company by the IRS. The United States has special rules for determining the classification of entities. Most UK limited companies are likely to be considered companies under the US default rules.
If the United States does consider a foreign entity to be a company under US tax law then a complex set of rules may apply. These affect companies that are controlled foreign corporations (CFCs) or passive foreign investment companies (PFICs).
The CFC rules can subject the US owners of a foreign corporation to US income tax on a portion of the retained earnings of the company. Specifically, we are concerned with the ‘subpart F’ rules, whether the company has invested in US property and the global low taxed income (GILTI) rules. All of these are complex and can lead to undesirable tax outcomes.
A company is a PFIC if 75% or more of its income is passive or 50% or more of its assets are passive income generating. Once considered a PFIC and absent any specific elections, highly punitive US tax rates and interest can arise. In the worst cases credits for foreign taxes paid can be denied leading to double taxation.
An owner of shares of a non-UK company may also experience UK tax problems once that owner establishes UK tax residency. A US LLC or a French SCI may be considered ‘transparent’ under local law, however, these would generally be seen as ‘opaque’ under UK law. This can lead to double taxation problems where the owner is taxed on the underlying profits in the local jurisdiction but on distributions from the company in the United Kingdom.
The United Kingdom also has specific anti-deferral tax rules (in conjunction with some fairly comprehensive general and targeted anti-avoidance rules). One of the major issues for consideration is §13 TCGA which can attribute the gains of an offshore company to its UK resident owner(s). The ‘transfer of assets abroad’ legislation can also require the income of certain offshore companies to be taxed upon their owners as the income arises.
Clients who are resident in the United States or the United Kingdom with corporate entities outside those countries should take advice regarding their corporate structures. US citizens with non-US corporations should be equally wary.
We are experienced in analysing corporate structures for owner-managers and helping them to consider what actions would achieve more tax favourable outcomes. These include:
- the use of US entity classification elections
- changing the form of the existing entity
- establishing a corporate ‘blocker’ above an existing entity
- decontrolling an entity (e.g. by gifting shares)
- making US PFIC-related elections (mark to market, qualifying electing funds)
- strategizing to mitigate the impact of UK anti-deferral rules (§13 TCGA and the transfer of assets abroad legislation)
Planning: Investing in real estate
The decision to own property in a foreign country inevitably leads to tax considerations. A US citizen or green card holder, resident in a foreign country also needs to be aware of the cross-border tax issues that can impact them from owning property there.
Firstly, there is the issue of exchange rates. Transactional amounts, such as acquisition costs and disposal prices, need to be converted at the relevant rate of exchange at the time of the transaction. This can lead to different levels of gain and loss between territories. There is a US tax trap for the wary concerning loans and exchange rates – where a loan is redeemed at a lower USD rate than that at which it was acquired an exchange rate gain can arise. This can result in unexpected tax bills for US taxpayers paying down their foreign mortgage related loans.
There are disparities between countries and tax reliefs for main homes. The United Kingdom currently has a generous regime whereby most people do not pay UK capital gains tax on the disposal of their main homes. The US regime only allows for an exclusion of up to 250,000 USD of gain for a taxpayer filing as single.
Particular issues arise where UK residents (who are not US citizens or residents) invest in US real estate. The FIRPTA (Foreign Investment in Real Property Taxes Act) rules can apply such that the gross proceeds of sale of the US property are subject to 15% US withholding taxes. If the value of the property far exceeds the gain, this tax withholding will be excessive but cannot be avoided unless a withholding certificate is requested from, and issued by, the IRS.
UK non-residents who dispose of land or residential property in the United Kingdom are subject to a special non-resident capital gains tax regime. Generally, this can require a disclosure and payment of tax within 30 fays of the conveyance of the property.
Corporate entities have been a popular mechanism for owning real estate. They can confer benefits in the form of lower corporate tax rates compared to personal income tax rates. Additionally, the corporate structure provides some legal liability protection to its shareholders. With careful planning, corporate entities can be used to mitigate inheritance / estate taxes.
There are down sides to owning property through a limited company. These include an elevated rate of Stamp Duty Land tax for properties in the United Kingdom purchased by companies and an Annual Tax on Enveloped Dwellings (ATED). The ATED is an annual tax payable by companies that own UK residential property valued at more than 500,000 GBP. On top of these, a foreign company owning UK property may fall within the anti-deferral regimes found in §13 TCGA and the ‘transfer of assets abroad’ legislation.
If a UK company owns US real estate then the FIRPTA rules (above) will need to be addressed.
We can help clients consider how to structure their property ownership from a tax efficient perspective. Our guidance can include:
- whether is tax efficient to hold real estate property through an entity or outright
- how to resolve existing structures that are inefficient for tax purposes
- consideration of how property should be held outright (e.g. as tenants in common or joint tenants under UK law)
- whether a main home election should be made for UK tax purposes – this would be applicable and possibly advantageous where the individual has more than one property
- how to plan for maximum main home relief in the territories where the owner is a taxpayer
- how to manage the US FIRPTA rules particularly for cash-flow management
- analysing how the UK non-resident capital gains tax rules apply to individuals who are not resident in the United Kingdom and own real estate property in the country
It is crucial that individuals review their investments to ensure that there are no unexpected adverse tax implications when they move between countries.
A health check as to whether locally tax efficient investments are globally tax efficient needs to be carried out. US taxpayers living in the United Kingdom or UK residents moving to the United States may be invested in ‘Individual Saving Accounts’ (ISAs) that are seen as tax efficient investment structures from a UK tax perspective. ISAs are not tax efficient from a US perspective and the income generated therein would be subject to US tax for a US taxpayer.
If a US taxpayer is invested in so-called ‘PFICs’ there can be significant adverse tax consequences. Non-US collective investments (such as UK unit trusts or Luxembourg SICAVs) are usually PFICs. The US would seek to tax some or all of the income from these investments at punitive tax rates with an interest charge based on the length of time the investments have been held. Additionally, foreign tax credit relief may not be available leading to double taxation.
Conversely, UK tax residents invested in ‘offshore funds’ that do not have HMRC reporting status are subject to a special regime that imposes higher UK tax rates.
We help in avoiding such tax pitfalls so the client can maintain the integrity of their portfolio to the maximum extent possible.
Our client’s investment portfolios can be very diverse. We have experience in helping our clients manage their portfolios from a tax perspective. We work with our clients’ investment advisers to consider the global tax efficiency of:
- investments that are specifically geared to tax efficiency in one jurisdiction only
- complex investment structures (e.g. cross-border private equity investments)
- bonds (e.g. offshore investment bonds)
- life insurance policies
- collective investments (with a view to avoiding PFICs, if the client ins a US taxpayer and non-reporting offshore funds, if the client is a UK arising basis taxpayer)
- simple investments (e.g. US state muni bond investments for UK resident taxpayers (on the remittance basis of taxation) who are also US taxpayers)
Trusts are popular devices for managing and protecting wealth. Trust law in the United States and the United Kingdom tends to be weighty and complex, particularly where there is a foreign element. It is quite easy for inadvertent consequences to be triggered when an individual moves from one country to another where that person is the settlor, beneficiary or trustee of a trust.
When the sole trustee of a US trust moves to the United Kingdom, he may inadvertently trigger UK tax residence status. The UK / US double taxation convention may not easily resolve the issue of dual tax residency for a trust as Article 4(5) requires the tax authorities of the two jurisdictions to try to reach a mutual agreement on the issue. This means there is a real possibility of two sets of annual reporting requirements and possibly conflicting tax laws to consider. It is essential that a migrating trustee considers the impact of his move from a global tax perspective.
Non-UK resident trusts are not usually subject to UK tax on foreign income. However, to prevent UK resident individuals avoiding UK tax by the transfer of assets into a non-UK trust, there are anti-avoidance mechanisms that can result in the settlors and / or beneficiaries being subject to tax instead. These mechanisms are known collectively as the ‘transfer of assets abroad’ provisions. Whether it is the settlor or the beneficiary who is deemed to be taxable under these rules matters as the mechanics as to the nature and timing of the taxable amounts are different. These anti-avoidance rules create an additional layer of complexity in a situation where there may already be a mismatch between the UK and US tax treatments.
The United Kingdom imposes inheritance tax (IHT) charges when ‘relevant property’ is settled into certain trusts. Equally IHT may be due when property is distributed from a trust or there is a ten-year anniversary of the date the trust was set up.
However, there are tax advantages where an ‘excluded property trust’ is set up. This is a trust that is settled by a UK non-domiciled individual using foreign situs property. There is no IHT when property is settled into trust and the property remains outside the scope of UK IHT even if the settlor becomes UK domiciled at a later date. It is a popular planning device for UK residents to avoid IHT by creating an excluded property trust prior to becoming either domiciled or deemed domiciled. There are many tax-related decisions to be made before establishing an excluded property trust and we can assist with these. They include co-ordinating the UK and US treatment of the trust income so that double tax relief is available (for example creating trust which is a settlor interested trust for UK purposes and a grantor trust for US purposes). If the settlor and their family are likely to leave the United Kingdom in future it may be desirable to ensure the trust with non-UK resident trustees. Conversely, if the family are likely to remain in the United Kingdom it may be desirable for the trust to be UK resident (and therefore have UK resident trustees).
Where there is a US beneficiary of a non-US trust which is a ‘foreign nongrantor trust’ under US tax law, he would need to report taxable trust distributions on his annual US tax return. There are potential US tax impacts of accumulation distributions and additional forms that are required to be filed (such as form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). Planning around accumulation distributions needs to be carried out proactively, particularly where the trust is invested in PFICs and there are both foreign and US beneficiaries. For UK resident beneficiaries it will be important to establish whether there is a mismatch of foreign tax credits where the tax falls on different people in each jurisdiction (e.g. the settlor in one country and the beneficiaries or trustees in the other). Such complications may also arise where the tax falls on different entities (e.g. a corporate entity in one country and its shareholders in the other). The UK / US double taxation convention does not come close to covering all cases where mismatches arise.
It is essential for settlors, trustees and beneficiaries to receive full and considered advice before taking actions that may have inadvertent and costly tax implications. We have experience in guiding our clients through the maze of complex UK and US tax laws to streamline and optimise tax outcomes in relation to trusts.