If you own property, shares, or other assets in the US, while residing in the UK, the financial implications can be daunting, particularly when it comes to tax obligations in both countries.
As a (now) UK resident with US assets, there are various tax liabilities and reporting requirements that affect you and your portfolio.
As you may already know, the US is one of only two countries that require their citizens to continue paying US taxes even after they have left the country which means, when you move to the UK, you’ll probably need to report your income twice.
However, as you’ll see later in this article, there are other ways to reduce your tax liabilities.
Property in the US
If you own property in the US but reside in the UK, you need to be aware of both US and UK tax implications.
- US tax liabilities: Ownership of property in the US subjects you to federal and state property taxes, which vary by location. If you decide to sell your US property, you should consider the impact of US Capital Gains Tax. The rate can be significant, depending on how long you have owned the property and the profit you realise.
- UK tax liabilities: In the UK, your US property is considered when calculating your potential Inheritance Tax (IHT) liabilities. If you sell the property, it may also be subject to Capital Gains Tax in the UK, although foreign tax credits may be available to mitigate double taxation.
- Reporting requirements: For tax purposes in the US, you may need to file Form 1040NR if you generate rental income from your property. In the UK, you must report any income or gains from your US property on your self-assessment tax return, taking care to claim any applicable tax relief.
If you become “domiciled” in the UK – after you have been a UK resident for at least four years – all your worldwide income and gains, including those from your US property, will be taxed in the UK.
This adjustment reflects the recent changes made to the non-domiciled regime and will need careful tax planning and consultation with an international tax adviser to manage your transatlantic tax obligations efficiently.
What if you have UK property?
If, on the other hand, you were to buy property in the UK but continue to live outside of the country, you would be classed as a non-residential landlord.
In this case, the UK Government taxes your rental income under the Non-Resident Landlord Scheme.
This means that tax is deducted at the source by your letting agent or tenant unless you’ve received approval from HM Revenue and Customs (HMRC) to receive the rent in full and pay tax via Self-Assessment.
Something to consider if you plan to only stay for a short time – it may be better not to purchase property, depending on your circumstances.
Assets in the US
Holding assets in the US, such as bank accounts or bonds, also involves understanding the tax obligations in both the US and the UK.
- US tax liabilities: The US imposes estate and gift taxes that could affect your financial planning. You must be aware of reporting thresholds and responsibilities, particularly if your assets exceed certain values.
- UK tax liabilities: US assets are relevant to your UK IHT situation. Furthermore, as of the new changes (mentioned above) if you are not eligible for the new FIG regime, your worldwide assets might be subject to UK taxes, which could influence your tax residency and domicile status.
- Reporting requirements: You must file a Foreign Bank and Financial Accounts Report (FBAR) if you have over $10,000 in foreign accounts at any point during the calendar year. Additionally, the Foreign Account Tax Compliance Act (FATCA) requires certain US financial accounts held by UK residents to be reported to the IRS.
We understand that many Americans are unaware of IHT – which is only levied in a few states in the US – but in essence, it is a 40 per cent tax on your estate when you die, and your assets are passed on to your beneficiaries.
We’re experts in managing this obligation for our clients, so if you’re worried about IHT’s impact on your loved ones, please get in touch.
Shares in US companies
As a UK resident holding shares in US companies, you face specific tax challenges in both the US and the UK.
- US tax liabilities: The US taxes dividend income and capital gains from the sale of shares. It’s important to speak to your adviser to find out how these taxes are levied and what rates apply, as this affects your investment returns.
- UK tax liabilities: In the UK, dividends and capital gains from your US shares are also subject to taxation. Dividends Tax is charged at between 8.75 and 39.35 per cent, whilst CGT ranges from 10 per cent to 20 per cent. This depends on your Income Tax band.
- Reporting requirements: You must complete a W-8BEN form to declare your non-resident status and claim a reduced rate of tax withholding under the US-UK tax treaty. In the UK, you’ll need to report any income or gains from US shares on your tax return, ensuring you claim relief for any US tax paid to avoid double taxation.
As with all other asset classes, it’s best to discuss your potential liabilities from shares with your adviser.
SMCO’s advice and tax planning tips
Navigating the tax responsibilities in both the US and the UK can be complex.
Therefore, it’s always advisable to consult with a tax adviser who specialises in both jurisdictions.
This ensures you comply with all requirements and explore opportunities to minimise your tax liabilities.
Effective tax planning strategies might involve:
- Utilising tax treaties: Take advantage of the Double Taxation Agreement between the US and UK to prevent double taxation on the same income, such as dividends, interest, and royalties.
- Timing asset sales strategically: Coordinate the sale of assets like US property or shares to align with periods of potentially lower tax liability in either jurisdiction.
- Claiming foreign tax credits: Maximize the use of foreign tax credits on your UK tax returns to offset taxes paid in the US, thereby reducing your overall tax burden.
- Engaging in effective estate planning: Use trusts and other estate planning tools to manage Inheritance Tax liabilities and facilitate efficient cross-border asset transfers.
- Maintaining accurate and comprehensive records: Ensure all financial transactions and tax filings are thoroughly documented to support tax return claims and simplify dealings with tax authorities.
Maintaining compliance is crucial to avoid penalties and ensure you manage your tax obligations effectively in both countries.
Always ensure your reporting is accurate and up-to-date and seek professional guidance from your adviser wherever possible.
Whether you’re dealing with federal and state property taxes in the US, trying to get your head around UK Capital Gains Tax (CGT), or worrying about UK IHT laws, our international tax advisers can help.
