What Americans moving to the UK need to know about tax

The writer is a partner at law firm Maurice Turnor Gardner

The world seems to be on the move, seeking friendlier tax regimes and what might be described as a more comfortable life. I am not surprised that the British are in the vanguard of this cohort. But the increase in the number of US citizens contemplating moving to the UK has come as a surprise. During much of my career the flow has been the other way. But whatever the motivation, if our practice is anything to go by, the surge in interest is real.

What should US citizens bear in mind if they are serious about such a move?

The UK is no different from the US: you need a visa to enter on a more permanent basis than as a tourist. I have remarked before that UK government thinking is not joined up. The Treasury is offering a variety of tax inducements to move to the UK, such as a new four-year regime with no taxes on foreign income and gains, but the Home Office has erected many barriers to entry to those not employed, studying or in a relationship with a settled person or UK citizen. Not all migrants who can contribute meaningfully will meet these narrow thresholds.

There is no equivalent of the Trump Gold Card, sadly. You need to plan meticulously if you are going to navigate the various options. A Global Talent visa, a Skilled Worker visa and migrating and/or establishing your own business all require careful thought and presentation, which of course take time.

Having obtained the relevant papers, you still need to be careful about when you actually take up residence in the UK. The UK tax year is not a calendar year. Eccentrically it begins on April 6 in one year and ends on April 5 in the next. We also have a more complicated residence test than in the US. Owning a home, frequent visits and the presence of close family members could inadvertently tip you into becoming tax resident in the UK before you had planned. If you qualify for the new exemptions on income tax and capital gains this might not be so much of a problem but, if not, it could land you with a tax bill you had not anticipated.

Most of the clients I see moving to the UK have already established a sophisticated estate plan, but unsurprisingly this is US driven. They are set up with revocable trusts, pour-over trusts, durable powers of attorney and healthcare directives, to name but a few. More often than not, in the UK these arrangements are at best ineffective and at worst generate unwanted tax consequences. Whichever, there will be confusion. It is essential these should be reviewed.

A frequent issue is where the client is a beneficiary of a trust established by a parent’s will. The existence of the trust can generate double tax which is not relieved by the US/UK tax treaty. We recently urged a newly UK-resident client to persuade his mother that continuing with her husband’s will trust and leaving her own assets in trust was not optimum. This would have created a mismatch of income tax and capital gains tax, which outweighed the inheritance tax advantages of leaving the trust in place.

The advice was logical, but on the human level adopting this strategy is going to be hard to manage: the client worries that there is an issue with the mother’s mental capacity and in any event this would be an awkward conversation to have. 

The hardest topic I have had to confront, however, was the US charitable foundation my US citizen husband and wife clients were running from the UK. Because the foundation was constituted as a trust in the US and the husband and wife were the only trustees, they were appalled to learn that English tax law would regard the trust as resident in the UK for tax purposes.

What is more, because its objects were not exclusively charitable as defined under English law and because the foundation was not registered with the Charity Commission, it did not qualify for any of the exemptions from income tax, capital gains tax and inheritance tax that UK charities would be able to access. In other words not only was it resident in the UK, it was also a UK taxpayer.

The US/UK treaty gave no relief in our case so we suggested we invite HMRC to agree with the IRS that no tax should be levied in the UK. The clients were adamant that this could not be the case — that the charity would be a tax problem in the UK — and that my advice had to be wrong. I was sacked, a clear case of shooting the messenger. All could have been solved if additional US resident trustees had been appointed to the trustee board before the founders had moved to the UK.

I am very excited to welcome US citizens to the UK. But there are some elephant traps out there that can be avoided provided advice is taken early enough.