Stepping Stones: What Americans need to know when arriving in the UK

Case study

When Mr Burton’s employer assigned him to the UK, he had already accumulated a large investment portfolio in the US. Having done some research on the differing UK tax system, when he approached us he was naturally very concerned about the tax implications around his investments and also his new residence status.

Minimising tax on investments

We explained that while he was now regarded as resident here in the UK, Mr Burton would not be regarded as domiciled here. Domicile essentially means “place of permanent belonging” and as he had made no definite plans to remain here in the UK for the rest of his life, he would not be regarded as UK domiciled.

Because of Mr Burton’s non-domiciled status, he could choose the remittance (we’ll explain that in a second) basis of taxation. This basis meant that all non-UK investment income and gains could be free from UK taxation, as long as said income/gains are not remitted (i.e. not brought) to the UK. The rules are complicated and they become less favourable the longer an individual is here. However, for the first seven years of residence, this opportunity can be used without an additional charge. In this client’s situation, the use of the remittance basis would be tax efficient.

Correctly structuring investment accounts

Looking to the future, Mr Burton considered bringing money from his US investment account to the UK. While this seemed a relatively straightforward task, in reality this posed an issue. Why? When an individual claims the remittance basis and then brings money to the UK from an investment account, it is deemed to be taxable on income and gains that are remitted first. This can undo all of the original planning to use the remittance basis and can in fact cause double taxation.

To avoid this issue, we normally advise our clients to create a separate investment account into which interest, dividends and capital gains are paid. This gives clients the option in the future to bring money from the main account into the UK, tax free. Unfortunately, many US banks, such as the one Mr Burton used, are unable to do such account structuring. Therefore, he made the decision to bring approximately £100,000 from his US investment account shortly after arrival in the UK, in order to fund a potential UK property purchase in the future.

The transfer of £100,000 was regarded as capital (and therefore tax free) as the funds in the investment account had all been generated before he moved to the UK. If the client had waited a few years before bringing the money to the UK then the transfer would have been regarded as firstly composed of whatever income and gains had been generated since becoming resident, which would have meant that it would be taxed.

Minimising tax on employment

As an American living abroad, you will still be taxable in the US on employment income. However, you can use the foreign earned income exclusion to exclude up to $107,600 from US taxation. For those earning in excess of this amount (including the foreign housing exclusion), taxes paid in the UK are used to offset the US tax due, generally meaning that those who are employed in the UK don’t have to pay US tax on employment income.

In Mr Burton’s case, as with all our clients, we considered whether it is better to utilise the foreign earned income exclusion, or to rely on claiming UK taxes paid as foreign tax credits, to offset the US taxes. The latter made the most sense, as not using the foreign earned income exclusion but relying wholly on UK taxes paid, meant that there were more UK taxes paid than were needed in order to offset the US taxes.

These unused foreign tax credits can be very useful as they can be used to offset the US tax on tax relief opportunities in the UK, such as pension contributions and investments in enterprise investment schemes, both of which are UK tax-advantaged but are not on the US side, which is why having excess foreign tax credits is so useful. With our assistance, Mr Burton made use of these opportunities, allowing him to contribute more to a UK pension and also make a £30,000 UK investment (which saved him £9,000 tax). The excess he did not use can now be carried forward for up to 10 years.

Complying with UK and US tax laws

No two cases are ever the same and for Mr Burton we spent some time understanding his situation and determining the US and UK compliance requirements. One important aspect of this was the Foreign Bank Account Reporting (FBAR) form. FBAR compliance is required where the aggregate balance of all non-US accounts exceeds $10,000 at any point during the year, whether or not the non-US account has any income. Failure to file these forms where required can result in large penalties. Mr Burton not only had his own accounts, but also had signatory authority over some of his employer’s accounts. We collated the necessary information and prepared the FBAR reports for him, together with their US and UK tax returns.

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The full Stepping Stones series can be found here.