On August 14, 2017, TWG International Tax Director Mishkin Santa interviewed UK advisor Mark Summers on hot topics in U.S.-UK taxation. In the first part of this two-part series, Summers addresses common tax planning considerations.
What are some common tax planning strategies for U.S. citizens going to the United Kingdom?
As U.S. citizens, you are taxable on your worldwide income in addition to being subject to worldwide foreign financial asset informational reporting. Once you become a tax resident in the UK, you are potentially subject to the tax regimes of two different countries.
Consequently, a lot of strategy is damage limitation—avoiding double taxation and keeping income and assets out of UK taxation. The UK uses a system of taxation based on remittance for people who are resident but non-domiciled (i.e., for people who do not regard the UK as their permanent home). This allows Americans to defer certain non-UK income and realized gains.
Common Tax Traps
Two big tax traps for Americans relate to trusts and limited liability companies (LLCs).
For U.S. citizens who have a trust, the moment they step off the plane at Heathrow with the intention of being a UK resident, they have just brought all the trust assets into the UK tax system. They cannot benefit from the special taxation system of deferring non-UK income and capital gains outside the UK. Also, once they determine they want to leave the UK, they could be subject to the UK exit tax, which is a mark-to-market tax on all the assets in that trust.
U.S. LLCs are regarded as real corporations in the UK and not as pass-through entities. Therefore, if any members or managers of these LLCs become UK tax residents, then the LLC will be subject to UK corporation tax on its profits. Upon leaving the UK, you may once again be subject to the mark-to-market exit tax on the assets in that LLC.
Before U.S. citizens arrive in the UK, they should work with a UK tax advisor to review the trustees, members, and managers of these various entities. With proper planning, modifications to these structures can keep these assets out of the UK tax net for income tax, inheritance tax, and so forth. A lot of the standard U.S. estate planning can also be very good for the UK if you tailor it before you move. If you fail to do that, it can be a horrible mistake.
What should U.S. green card holders going to the United Kingdom look out for?
U.S. green card holders (GCH), just like U.S. citizens, are taxable on their worldwide income, as well as being subject to worldwide foreign financial asset informational reporting. The classic mistake is the scenario in which a U.S. GCH gets ahold of a UK or U.S. tax advisor who does not know the international rules very well. The advisor mistakenly believes and advises that the person should take a position as a resident in the UK and nonresident of the U.S. under the income tax treaty in order to be shielded from U.S. income tax.
Why is this bad advice? From the point of view of the U.S., you have now taken a U.S. tax position that is a surrendering event for the green card. Even worse, if you have held the green card for more than 7 years, you may trigger an automatic mark-to-market of worldwide assets (U.S. exit tax), which is again, an expensive mistake to make. GCHs definitely have to be very careful. They also have to be careful with how much time they reside outside the U.S. There are time limits. One should always seek the advice of a U.S. immigration attorney in addition to a very experienced U.S. international tax advisor before making these types of decisions.
What are some common tax considerations for UK citizens going to the United States?
The UK does not tax by reference to nationality. That is an almost unique anomaly that the U.S. shares with North Korea and Eritrea. In the UK, the big issue is domicile.
If you properly leave the UK for the U.S., you stop paying income and capital gains taxes. You are only liable for tax in the U.S. The only exception is if you return within 6 UK tax years.
The tax year in the UK runs April 6 to April 5. If you reside short-term outside the UK, then for certain line items of income and capital gains that you realize when you are outside the UK, you can get taxed when you return. The big, big crunch for the UK person is domicile. It’s a bit like the gift and estate tax, domicile in the U.S., in the sense of where do you consider your permanent home to be?
UK inheritance tax can also be a big problem. Why? Because if you are UK domiciled, then you are subject globally to the UK inheritance tax.
If you are born to British parentage and move abroad, it is very difficult to break domicile. You must show that you have formed a domicile of choice somewhere else, and when we talk about the U.S., it relates to a specific state in the United States of America. In order to break UK domicile, it is not sufficient that, say, you move to New York to work on Wall Street and then have an intention of retiring to Florida because it’s got the better sun and lower income tax. You have not broken UK domicile until you arrive in Florida, because you do not intend to remain permanently or indefinitely in New York.
Do you see any opportunities to update the tax treaty between the U.S. and the UK?
Tax reform is going on, and that’s going to have a huge impact, as we well know. It will have an impact on America’s tax treaties, I suspect, with almost every major country in the world. There will be some shift. For example, let’s just talk about the estate tax repeal. The problem is we don’t know when, we don’t know how, and we don’t whether it’ll look something like the attempt that George W. Bush did back in the 2000s, reducing and then eliminating the estate tax but only temporarily, or whether it’ll be something rather different where there’ll be some separation.
Estate Tax Treaties
Other countries in the world have repealed or do not have an estate tax or inheritance tax. The UK actually has very few treaties, even fewer than the U.S. does. It only has 10 estate tax treaties, and the U.S. is one of them. Most of those countries do have a form of inheritance tax in place, and the treaties almost never seem to get modified or amended because there’s no appetite for it.
To illustrate this, let’s take Sweden. Sweden repealed its inheritance tax in its entirety about a decade ago, including gift tax. It completely went. Therefore, the entire treaty was put into abeyance. The UK simply suspended it.
With the U.S., if it still retains a gift tax, then you are going to have to look at some sort of partial modification or change. And I suspect there’s no real appetite for that, even with the income tax treaty, which was last done in 2001—it is very long overdue that that should be amended, but the messages we get are that that’s not going to happen within a decade. As for the 1980 estate tax treaty, it isn’t even on the agenda for discussion. So, whilst it ought to be amended to take into account massive changes, particularly in the UK inheritance tax system, the reality is that there’s no political appetite. It’s unlikely to happen. This may lead to opportunities, but also, under tax reform, it may also to lead to double taxation or unintended consequences in other areas.
[More to come…Part 2 of Mishkin’s interview with Mark Summers will be published in our next Newsletter]
Mark Summers – Biography
Mark advises on matters of cross border taxation and international estate planning.
He advises wealthy individuals and family offices as well as the private banks and fiduciaries that service them. Mark is expert in structuring clients’ affairs where they are affected by complex multi-jurisdictional tax and legal issues; he is particularly noted for innovative solutions for clients with US or European connections.
Mark is also expert on matters of UK taxation as it relates to individuals and their wealth holding structures. He regularly advises on the remittance basis of taxation for non-domiciliaries, matters of UK tax residency and the taxation of UK real estate. He also advises on the regularisation of untaxed assets particularly where there is a multi-jurisdictional dimension.
Mark is admitted to practise in England and Wales and is admitted to the EU list of the supervisory commission of lawyers for the canton of Zurich and the Swiss Federation. He heads Charles Russell Speechlys’ Swiss offices and resides in the Swiss canton of Zug with his family.