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Tax planning for US citizens in the UK

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The US (unlike most other jurisdictions) taxes its citizens wherever they reside. This means that US citizens living in the UK are potentially subject to both US and UK tax. Ther...

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Date: 13/07/2022

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The US (unlike most other jurisdictions) taxes its citizens wherever they reside. This means that US citizens living in the UK are potentially subject to both US and UK tax. There are ways to avoid double taxation, although there are also pitfalls to be avoided.

Frequently the US/UK double tax treaty will come to the rescue. The treaty will give one jurisdiction primary taxing rights, while allowing a credit in the other for tax paid in the primary jurisdiction.

However, interests in US corporate structures can present difficulties - especially interests in LLCs or ‘S corporations’. The US treats these structures as ‘transparent’ for tax purposes and members are taxed on the corporation’s profits as the profits arise. In contrast, HMRC usually views these entities are ‘opaque’ for UK tax purposes so that UK tax is not assessed until that profit is paid to a UK resident.

A UK resident US citizen will therefore pay tax on the profits from the corporation in the US and pay additional tax in the UK when a distribution is received. HMRC’s view is that the tax is paid on different sources of income and so tax paid in one jurisdiction is not available as a credit against the tax paid in the other.

So, what to do? The position can be relieved in part for remittance basis users by retaining their distribution outside the UK. However, that tax treatment is not available indefinitely. A longer term and in some senses more satisfactory solution can be achieved by structuring the interests to maximise tax efficiency in both the US and UK; this needs careful planning to be effective.

Trusts arrangements can represent another area to consider. US citizens may be advised to create a “living trust” (sometimes called a “revocable living trust”, or a “grantor trust”); this might be to avoid the need for lengthy and complex probate procedures and for more general estate planning purposes. Typically these trusts are viewed as transparent for tax purposes and so income arising is taxed on the settlor. In contrast, HMRC may assess these trusts as being subject to tax in their own right. In this situation, the settlor and beneficiaries will need to navigate a relatively detailed web of UK anti-avoidance rules that apply to offshore trusts and consider how the availability of tax credits between the US and UK can be optimised. Often there are way in which this can be managed however when doing so it is important to be aware of how matters can inadvertently be “made worse”.

It is important to take advice in both jurisdictions. Typically, we coordinate the UK advice that we provide with advice from our client’s own US tax adviser or advice from US tax professionals that we source. With careful planning, it is often possible to work around these hazards and arrive at an integrated approach that works well in both jurisdictions.

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