US/UK TAX PLANNING

US/UK TAX PLANNING with ALEX JONES, Partner at London Tax Firm, RAWLINSON-HUNTER https://youtu.be/UjgQRpfqJ-E Thousands of Americans live and work in the UK and record numbers of them are applying for British citizenship. Planning for taxes for these folks has always been challenging, but in 2024, with the change in the non-DOM rules, it's gotten even more difficult. To help us understand what's happening here and to try to identify some of these issues is ALEX JONES. He's a partner at Rawlinson Hunter, the British tax firm. Enjoy. Outline 00:00 Understanding UK Tax Law Changes for US Citizens07:00 Navigating Residency and Tax Implications11:49 Planning for Inheritance Tax and Trusts19:51 Pre-Immigration Tax Planning Strategies30:03 Managing Double Taxation and Tax Credits https://open.spotify.com/episode/4Hmqaalhjk3NklfMCWNd4X?si=8e45eac2d2f247cc Transcript of US/UK Tax Planning Frazer Rice (00:04) Well, we have certainly had a lot of news with British tax law changing. And for those of us here in America who may or may not be part of getting to Europe in a major way and in the UK in a more permanent way, maybe give us a little overview of ⁓ A, what happened, but more specifically, how the UK thinks of US citizens, which can take different forms. Alex Jones (00:31) Let's start with the back end of that question, how we regard Americans. So from a tax point of view, clearly what we're really saying is how do we regard Americans who are exposed to UK taxes? And typically that means Americans who are here. Like most countries in the world, the UK will tax people on UK sources of income. If somebody has a trade or business operating in the United Kingdom, we're going to try and tax it whether they are here or not. But if the US individuals physically in the United Kingdom, then the UK is going to try and tax them in a number of different ways, which I'll talk about in a second. The pause is really just to emphasize the fact that they're American. So a US citizen or US green card holder is going to be US worldwide taxable, whether they live in America or not. So America is going to look at everything everywhere in an American way in dollars in a calendar year. And at exactly the same moment in time, albeit in the UK we have a different tax year end. Our year end is a rather crazy 5th of April year end. Exactly the same amount of time the UK is going to look at exactly that same person and say, hey, what are we going to tax? And so you're starting with the premise that both countries are fighting over who gets the tax first. And the first thing you have to do is look at the two sets of domestic legislation to see how to start, where the problems are, and then you start looking beyond that. In principle, the UK is going to tax people who are resident in the UK on worldwide income. So anything everywhere under UK rules, UK fiscal year, in sterling, et cetera, et cetera. And somebody who's not resident in the UK on UK-CITUS connected income only. However, the UK has long had a regime which has been known as the domicile regime or the remittance basis regime, which has been pretty well known internationally where we said, Look, if you don't originate from here, if you're a foreigner coming in for a period of time, could be indefinite, could be reasonably long, but not permanently, then we won't necessarily tax all things which are non-UK. We would tax things that you brought into the UK, remitted, but we wouldn't necessarily tax non-UK things that you didn't otherwise bring or use or benefit from in the United Kingdom. So the thing that changed in the budget that was announced at the end of October 2024 that largely came into force on the 6th of April 2025 is that we said, hey, this domicile regime, this remittance basis regime is kind of too beneficial to wealthy individuals. You have neighbors who are paying differential amounts of tax just because one person's kind of foreign and the other person's a blue blooded Brit who's lived here forever. That's not right or fair morally. So what we'll do is we'll say, okay, we're to do away with this term domicile. We're not going to use it for income tax or the estate tax purposes particularly. And we're going to create some new terms. And one of them we'll create it, which is a four year regime. call the fig regime for an income gain regime where we basically say, again, we're going to tax UK stuff, but we won't tax foreign things for that four year window. But once you've been in the UK for more than four years, we're then going to tax your worldwide income. And then we have an extra piece we've added on, which says, if however you've been here for a long time, which is basically resident for 10 out of the last 20 years, we're also going to say, now you get worldwide inheritance tax. If you die while here, well, if you die with UK stuff, we're going to tax you on your worldwide assets. as opposed to potentially just your UK only assets, which is how we typically would have treated you if you were a non-domiciled individual under the old regime. So lots of change as to how the UK taxes people and therefore how we view the American is all about the interaction of the two. It's all about, yeah, but I've got both. I'm an American, I'm paying US income tax, I'm paying US estate and gift taxes. How do I deal with the fact? How do I prevent? Two sets of taxation globally, such that my income tax rate isn't a top rate of 37. What I don't want it to be is 37 plus the top rate in the UK of 45, plus maybe some tax I'm still paying in California or New York because I've got a residential property that I'm renting out in one of those two locations. how we treat Americans is we treat them under domestic rules. We treat them in a way that says what are we or are we not going to tax in our way how we think about things. And by that I mean if we think it's taxable, it's taxable. If you guys think it's municipal bond interest which is exempt, that doesn't mean anything to UK eyes. We look at it go, well, it's just interest income. From our perspective, Britain has our own domestic rules which try and stop double taxation. That means give credit for other people's taxes. Frazer Rice (05:37) Sure. Alex Jones (05:50) And also, most importantly, between the UK and US, we have two tax treaties. We have one tax treaty that deals with UK and US income tax, and we have a completely separate tax treaty which deals with UK inheritance tax and US estate and gift taxes. So we call estate and gift tax inheritance tax in the UK, and it applies in life or death. So we've got two treaties which are both trying to minimize unacceptable double taxation. That's kind of a… kooky term of art, Minimise unacceptable double taxation. A little bit of double taxation may be acceptable in the eyes of government. Well, these two treaties, they're designed to try and minimise. So when we deal with both UK and US taxes, and I'm a both UK and US tax guy, I've been doing US tax since the late 1980s, what we're trying to do is try and get the two systems as closely aligned as we can. To the amount of credit we can get between the two countries so that overall the person's paying the lowest amount of tax that they should pay as opposed to maybe double tax. Frazer Rice (07:00) US/UK Tax Planning So if you're so let's steer this back to the Americans quickly. The typical situation that you're running into is, guess, an American who has moved over to the UK either for work or for something else. Maybe take us through a little bit of how you analyze that in terms of sort of understanding how long they've been there and then how that sort of surfaces through the regime you just described. Alex Jones (07:25) Yeah, so. there's always a duality here so we have to talk about sort of both sides to understand the whole but from a UK perspective when we're thinking about how long have people been here is what we're really saying is hey are they UK tax resident have they done enough to make themselves UK tax resident because if they are they've got an expansion on the things we can tax maybe we can start taxing worldwide income and in the UK we have a test we call substantial residence test, statutory residence test, excuse me. And that's a slightly complicated set of rules, which is designed to say, hey, if you spent too much time in the UK, are you tax resident? If somebody spends, as an example, more than 183 days or 183 days or more a year in the UK, we're going to treat you as a tax resident under pretty much all circumstances. But if you spend less than 16 days a year in the United Kingdom, we are always going to treat you as non-resident. And that's quite a big gap. In between those two, there's a combination of day of time and factors which can trigger residency. So we're looking at how much time. We're also looking now under this four year FIG regime as to have you been here for more than four years? Have you been here for more than last four years? Because if you have been, we are going to tax worldwide everything. If you haven't been, if you're still in year two or three or four, then we aren't going to tax the non-UK income or gain sources or at least most of them. And indeed, we won't even tax you if you bring and use those funds in the UK. We'd quite like you to bring that money into the UK because that's good for the UK economy after all. From a US point of view, ⁓ ignoring US citizens or green card holders, you have a test which is called the Substantial Presence Test. That's basically what the test you would apply to a non-American who is spending time in America to determine whether they were US tax resident and therefore worldwide taxable in America. So both countries are looking at a time component as to where you're spending time.