US-UK Tax Systems Collision: What Happens Next?

What Happens When the US and UK Tax Systems Collide? (And how do you minimize your burden if you are affected?)

Thousands of Americans live and work in the UK. Record numbers are applying for British citizenship. UK tax planning has always been challenging, but in 2024, with the change in the NON-DOM rules, it became more difficult. To help us understand these issues is ALEX JONES. He's a partner at Rawlinson Hunter, the British tax firm.

00:00 Understanding UK Tax Law Changes for US Citizens
07:00 Navigating Residency and Tax Implications
11:49 Planning for Inheritance Tax and Trusts
19:51 Pre-Immigration Tax Planning Strategies
30:03 Managing Double Taxation and Tax Credits

Frazer Rice (00:04)
We have certainly had a lot of news with British tax law changing. For those of us here in America who may be getting to the UK in a more permanent way, give us an overview of what happened and how the UK thinks of US citizens.

Alex Jones (00:31)
Let's start with the back end of that question, how we regard Americans. So from a tax point of view, clearly what we're really saying is how do we regard Americans who are exposed to UK taxes? Typically that means Americans who are here. Like most countries in the world, the UK will tax people on UK sources of income.

If somebody has a trade or business operating in the United Kingdom, we're going to try and tax it whether they are here or not. But if the US individuals physically in the United Kingdom, then the UK is going to try and tax them in a number of different ways, which I'll talk about in a second.

The pause is really just to emphasize the fact that they're American. So a US citizen or US green card holder is going to be US worldwide taxable, whether they live in America or not. America is going to look at everything everywhere in an American way in dollars in a calendar year. At exactly the same moment in time, albeit in the UK we have a different tax year end. Our year end is a rather crazy 5th of April year end.

Exactly the same amount of time the UK is going to look at exactly that same person and say, hey, what are we going to tax? You're starting with the premise that both countries are fighting over who gets the tax first. The first thing you do is look at the two sets of domestic legislation to see how to start, where the problems are, and then you start looking beyond that.

In principle, the UK is going to tax people who are resident in the UK on worldwide income. So anything everywhere under UK rules, UK fiscal year, in sterling, et cetera, et cetera. Somebody who's not resident in the UK on UK-CITUS connected income only. However, the UK has long had a regime which has been known as the domicile regime or the remittance basis regime, which has been pretty well known internationally where we said,

Look, if you don't originate from here, if you're a foreigner coming in for a period of time, could be indefinite, could be reasonably long, but not permanently, then we won't necessarily tax all things which are non-UK. We would tax things that you brought into the UK, remitted, but we wouldn't necessarily tax non-UK things that you didn't otherwise bring or use or benefit from in the United Kingdom.

So the thing that changed in the budget that was announced at the end of October 2024 that largely came into force on the 6th of April 2025 is that we said, hey, this domicile regime, this remittance basis regime is kind of too beneficial to wealthy individuals. You have neighbors who are paying differential amounts of tax just because one person's kind of foreign and the other person's a blue blooded Brit who's lived here forever.

That's not right or fair morally. So what we'll do is we'll say, okay, we're to do away with this term domicile. We're not going to use it for income tax or the estate tax purposes particularly. We're going to create some new terms. One of them we'll create it, which is a 4 year regime. call the FIG regime for an income gain regime where we basically say we're going to tax UK stuff, but we won't tax foreign things for that 4 year window.

But once you've been in the UK for more than four years, we're then going to tax your worldwide income. And then we have an extra piece we've added on, which says, if however you've been here for a long time, which is basically resident for 10 out of the last 20 years, we're also going to say, now you get worldwide inheritance tax.

If you die while here, well, if you die with UK stuff, we're going to tax you on your worldwide assets. as opposed to potentially just your UK only assets, which is how we typically would have treated you if you were a non-domiciled individual under the old regime. (cont.)

Full Transcript: wealthactually.com
#unitedkingdom #taxplanning #usuktaxplanning #internationaltax