Stepping Stones: What Americans in the UK need to know about trusts

Case study

Robert was a US citizen initially planning to move to the UK for a few years for work but over time he has extended his stay. After originally seeking advice on how to best manage his assets and plan tax-efficiently from a US/UK Income Tax perspective, over time he became concerned about becoming deemed-domiciled from an IHT perspective. He therefore approached our US/UK tax experts for advice tailored to his unique circumstances.

Pre-deemed domicile planning

We firstly advised Robert on a planning opportunity before he became UK deemed domiciled, which was available due to him having a domicile in Massachusetts by origin. This planning related to the assets that he had in the US that would otherwise fall into the UK IHT estate, should he pass away while deemed domiciled in the UK. 

There’s a great difference between the current US estate tax threshold and the UK IHT threshold and so there’s potential for $5million of tax savings based on current rates for US citizens ($10million for US citizen spouses), should the assets be outside the UK IHT estate. 

Therefore, instead of Robert bringing his US assets into the UK IHT regime after 15 years of residence in the UK, the non-UK assets could simply be settled into an Excluded Property Trust before he became deemed-domiciled, protecting those assets from IHT into the future.

Final regulations have been issued in the US confirming that large gifts made between 2018 and 2025 (when the current Estate/Gift Tax threshold expires) will not lose their tax benefit once the threshold decreases after 2025.

US/UK tax implications

Robert moved to the UK and was then a US citizen, UK resident, non-UK domiciliary, who established a Excluded Property Trust before he became deemed-domiciled. It was now important for him to consider the Income Tax and Capital Gains Tax rules in both the US and the UK to ensure there was no double taxation.  

The trust was set up as a Foreign Grantor Trust for US purposes, which meant that Robert was taxable on the assets within the trust as if it was his own, until his death when the trust became a Foreign Non-Grantor trust. At this time, there would either be taxation for the trustee or for the beneficiaries when they benefit from the trust assets.  

There are annual reporting requirements for US owners of Foreign Grantor Trusts on Form 3520 and the trustee is responsible for filing Form 3520-A. Penalties for failure to file such forms are high and it is the settlor who is subject to penalties. Therefore, it’s in the interest for the trustees to file Form 3520-A. Robert could submit a substitute form 3520-A if he had adequate information from the trust to do so.

For UK tax purposes, Robert could claim the remittance basis in the period he was non-UK domiciled, because the assets were non-UK situs and therefore could be protected from UK tax for a period of time from the income and gains within the trust. However, based on Robert’s circumstances, having access to the funds in the UK was important to him and the remittance basis was not suitable. Therefore, the UK settlor interested trust rules became important. 

If the trust meets the protected settlement rules for settlor interested trusts, this could be problematic for a US person due to the taxation in the UK not occurring until such time that there is a distribution. It might be in the interests of the settlor to taint the trust for these purposes, so that income and gains are taxable to the settlor in line with the US tax treatment. This alignment would help in terms of avoiding double taxation as the timing of UK tax payments could be made so that foreign tax credits could be available to offset against the US tax on the same income/gains. 

Post death of the settlor

Part of our advice to Robert, included the implications should he pass away. On death of the settlor, the Foreign Grantor Trust becomes a Foreign Non-Grantor Trust. Income and gains that accrued from the date of death onwards and distributed to a US beneficiary would be taxable to that US beneficiary. At this stage it’s important for the trustees to be aware of the US ‘throwback tax’ rules and the UK equivalent ‘stockpiled gain’ and ‘relevant income’ rules where there are US person beneficiaries and UK resident beneficiaries, so a specific bespoke plan was sensible. This plan included clearing out income and gains each year to ensure there was no build-up of accumulated income or gains.

Overall, by working with us Robert benefitted from: 

• protection from Inheritance Tax before he became deemed domiciled;  
• an understanding of the US and UK income taxation requirements to him during his lifetime and avoiding double taxation; and
• having a plan in place post death so that US person beneficiaries and UK beneficiaries could receive distributions efficiently minimising global taxation. 

Key point to note

US citizens in the UK should also keep an eye on potential future reform to the tax rules for non-UK domiciliaries. For instance, the current Shadow Chancellor has proposed scrapping the current regime and replacing it with a shorter-term scheme for those staying in the UK up to five years. We don’t know yet what the details of this would be, so US citizens coming to the UK or who have been in the UK enjoying the benefits of the non-UK domiciliary regime, should keep a watching brief and be prepared to accelerate plans if beneficial.

The use of a US domestic trust as an Excluded Property Trust could also work, however the advice would be somewhat different.

For professional advice tailored to your unique circumstances, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided.

The full Stepping Stones series can be found here.