The US and UK tax systems are fairly easy to understand on their own. It’s when you combine them that things go from simple to ‘stick your head in the sand’ complex.
Read on for a brief primer on the basic principles of the two systems and how they interact when you’re in the unfortunate circumstance of needing to follow both.
The US System (tax year: January 1st to December 31st)
All citizens, residents, and Green Card holders are taxed on their worldwide income and gains regardless of whether they are resident in the US. This is called a citizenship based system of taxation. Simple enough.
The only other country in the world to apply this system of taxation is a totalitarian one-party dictatorship in Africa called the State of Eritrea; however something tells me they aren’t chasing down fleeing citizens for tax payments. I digress…
The UK System (tax year: April 6th to April 5th)
Most countries apply what is known as a residency based system of taxation. This means you will only be taxed on your worldwide income and gains while you are tax resident in the country.
The UK follows this system.
But there is a twist for individuals who are considered ‘non-UK domiciled’.
(Please note: The topic of UK domicile is complex and is a post in its own right. For the purpose of this article - and since this newsletter is aimed at US expats - we will make the assumption that most Americans moving to the UK are not considered UK domiciled when they arrive. If you are unsure of your domicile status you should speak to a qualified UK accountant.)
As a non-domiciled individual, you are given the choice each tax year to be taxed in one of two ways: 1. the arising basis or 2. the remittance basis.
1. The arising basis (worldwide)
The first, and simplest way, is that you can be taxed on all worldwide income and gains. This is called the ‘arising basis’ and is the same way the US taxes its citizens. The good news with the arising basis is that as an American, you get a credit in the US for taxes paid in the UK. This means that in most instances you will simply pay the higher rate of tax between the US and the UK.
If you are filing on the arising basis, it could be a good idea to make your UK tax payments (if you owe anything) before the end of the calendar year. Otherwise, you may have to wait another tax year to claim the tax credit in the US and end up paying tax in both countries until the credit can be applied.
2. The remittance basis
You also have the option of being taxed on ‘the remittance basis’. This means that the UK will only tax you on UK source income and gains or on certain assets that you bring into the UK where UK tax has not been paid. The remittance basis is free for the first seven tax years you spend in the UK. Between years 8-15, HMRC charges you an annual fee for the right to ignore your non-UK assets. This is called the remittance basis charge (RBC) and starts at £30,000/year for years 8-12, and moves up to £60,000/year for years 13-15.
The remittance basis is a double edged sword.
It can be very useful if you have a complicated existing situation (i.e. trusts, LLCs, existing portfolios with lots of funds) AND you plan to stay in the UK for a short period of time.
The downside is that it reduces flexibility and possibly restricts access to your non-UK wealth.
So what should you choose?
A good accountant will help you make the right decision based on your specific circumstances. Let me know if you need a recommendation.
It’s common for UK accountants working with non-domiciled Americans to default to filing their clients on the ‘remittance basis’. This means they don’t need to worry about gathering information on any assets that may be held outside the UK and may mitigate double taxation (or inefficient taxation) concerns if there are existing complex structures in place such as LLCs.
While in many cases this will be the right decision, there are situations where it could make more sense to choose the ‘arising basis’ (worldwide) in the first instance.
For example:
If you have no assets outside the UK
If there is a possibility that you will stay in the UK on a longer term basis (greater than 7 years) and you would like the flexibility to always have access to your worldwide assets in the UK without further complications.
Life is unpredictable and what you think your future plans are now will likely change. It’s very common - especially for Americans - to think they are coming to the UK for a few years, only to wake up 15 years later with a partner, a house, a few kids, and a very expensive and complicated tax situation to untangle.
If you maintain flexibility in your financial affairs and seek appropriate advice along the way you can avoid a lot of mental (and financial) pain down the road.
Thanks for reading.
Until next time,
Billy
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Disclaimer
All views expressed are those of Billy Mathews and do not represent the views of Brown Advisory. This material has not been approved or endorsed by Brown Advisory. It is not intended to be, and shall not be construed as being, investment or tax advice. Investment decisions should not be made on the basis of it. The information contained herein is based on materials and sources believed to be reliable, however, no representation, either express or implied, is made in relation to the accuracy, completeness or reliability of that information.
Hi, can you share a recommendation for an accountant for US citizens working/living in UK?
Hi, can you give a recommendation for an accountant dealing with US citizens working/living in UK?